How To Profit From The Great American Energy Boom (XES, SLB, BHI, APC, RIG)
Mike Burnick: In spite of the red-hot stock market gains to start this year, the economic data has turned decidedly chilly of late.
For instance, many economists were shocked when the recent gross domestic product report (GDP) showed a 0.1 percent contraction in U.S. economic activity during the last three months of 2012. That’s recession territory if it persists.
But in fact, negative surprises in the economic data have outnumbered positive reports since the very beginning of this year, as my colleague Tom Essaye pointed out last week. The graph below compares the level of the Citigroup U.S. Economic Surprise Index (top panel) to the S&P 500 Index (bottom).
In recent years, whenever the “surprise” index has peaked and rolled over, which it has been doing since January 1st, it often foreshadowed short-term corrections in the stock market.
But the economic data hasn’t been completely dominated by negative surprises. There have been a few bright spots, too … and therein lies opportunity for savvy investors.
Case in point, just last week investors were treated to a positive surprise in U.S. trade data. The trade deficit shrank 20.7 percent in December to the lowest gap in nearly three years thanks in large part to …
The Great American Energy Boom!
Record petroleum exports are the biggest factor working in favor of our declining trade deficit as the U.S. inches ever closer to energy self-sufficiency. You have no doubt heard this story. But the dazzling statistics behind the American energy boom are worth repeating:
- Oil exports jumped $11.6 billion in December … and for all of 2012 shipments of U.S. crude climbed 4.4 percent to a record high $2.2 trillion!
- Over the past six years, U.S. production of petroleum and natural gas has jumped from 15 million barrels of oil-equivalent a day to 20.1 million … that’s a 20-year high.
- Over the same period, imports fell from 14 million barrels a day to less than 8 million, a 25-year low.
Domestic crude oil production grew by a record 766,000 barrels a day last year alone. That’s the highest production level in 15 years. And it’s the largest single year surge in output since the very first commercial oil well was drilled in Pennsylvania in 1859!
As a result, we met 84 percent of our domestic energy needs in 2012, on track for the highest rate in more than twenty years.
This has hugely positive implications for the U.S. economy. But it’s simply not getting enough attention. In addition to helping balance our chronic trade deficits, the American energy boom is boosting incomes and creating jobs. Just ask folks in the shale-oil boom towns in the Dakotas or Pennsylvania.
Also, it’s making American industry more competitive as plentiful domestic oil and natural gas supplies cuts U.S. manufacturing costs. For instance, natural gas costs just $3.55 per million Btu domestically … compared to $12 in Europe and $16 in Japan. That’s a huge plus for energy intensive industries like steel making and specialty chemicals. And domestic oil prices consistently trade at a discount to Brent Crude, the benchmark in Europe.
So it’s really no surprise that energy has been the best performing major sector so far in 2013, up 7.9 percent in January alone. But if you’re thinking you missed the boat on the American energy boom, think again …
This is a long-term trend that holds big profit potential for years to come. In fact, by the end of this decade, the U.S. will become the world’s largest oil producer, according to the International Energy Agency.
And ExxonMobil (NYSE:XOM) says that by 2025, North America will be a net energy exporter to the rest of the world … the OPEC of the Americas.
Two Ways to Profit from the Great American Energy Boom
In spite of strong gains to start this year, valuations for the U.S. energy sector are incredibly attractive right now. In fact, energy stocks are trading at a 40 percent discount to their historic valuation.
Drilling down to the individual sub-sectors and companies that are best positioned right now leads me to the Oil & Gas Service Sector.
There is a massive infrastructure build going on in the U.S. as domestic energy production ramps up. Pipelines, storage facilities, export terminals … U.S. energy equipment companies are in a great position to reap the first profits from American’s energy boom.
Essentially, these stocks supply the picks-and-shovels to build-out the domestic infrastructure that will accommodate increased production of oil and gas here at home.
The SPDR S&P Oil & Gas Equipment and Services (NYSEARCA:XES) is a great way to own an entire basket of these leading stocks in a single trade. Within this ETF are many of the biggest players in the industry including: Transocean (NYSE:RIG), Baker Hughes (NYSE:BHI), and Schlumberger (NYSE:SLB).
To zero in for even more profit potential from one of the best stocks in the business, consider Anadarko Petroleum Corp. (NYSE:APC).
The company is a leader in new drilling technologies that can squeeze more oil and gas production out of existing wells including fields that had been given up for dead.
Anadarko is on the cutting edge of the great American energy boom as one of the largest independent oil and gas producers. Last year, the company discovered a shale deposit in Colorado that could hold 1 to 2 billion barrels of recoverable reserves — it’s the largest new discovery in the U.S. in more than 40 years!
Both XES and APC are trading near 52-week highs. But in either case, I see a lot more upside for these securities and the energy sector as a whole.
As you can see in the chart above, the best gains for energy sector investors may be in the months ahead. Based on many decades of seasonal price patterns, energy stocks in the S&P 500 historically perform best over the six months from February through July.
That’s why any near-term correction in the stock market should provide a nice buying opportunity in energy. Even with the sector up nearly 8 percent already this year … the best may be yet to come.
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended inMaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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