How To Profit From Oil & Gas No Matter The Commodity Price?
John Whitefoot: Whether the price of oil and gas is moving up, down, or sideways, the commodity still needs to get transported somewhere. And with a slowly improving economy, the U.S. oil and gas pipeline infrastructure will be called upon to move more and more liquid gold.
Today, America’s natural gas pipeline network is made up of 210 different systems covering 305,000 miles of interstate. In the United States, 55,000 miles of trunklines move 5.6 million barrels of oil each day. (Sources: “Natural Gas,” U.S. Energy Information Administration web site, last accessed July 23, 2013; Alerian MLP ETF web site, last accessed July 23, 2013.)
But thanks to America’s soaring oil boom, the demand for pipelines and other oil and gas infrastructure is expected to climb significantly over the next few years. Pipeline demand in the Bakken Shale in North Dakota is where the majority of demand will come from. The Keystone XL pipeline winning federal approval will also drive North American demand.
There is also a huge demand for liquid natural gas south of the border. Mexican imports of U.S. natural gas have jumped 92% since 2008, and with increased demand, Mexico could be the destination of 10% of U.S. production. To help meet that demand, the U.S. has at least six new pipeline projects aimed at sending gas southward under consideration. (Source: Forest, D., “A surprising source of demand for US natural gas,” The Christian Science Monitor, July 4, 2013.)
As it stands, between now and 2016, the demand for oil and gas infrastructure is expected to climb more than six percent each year, hitting $12.0 billion. In 2011, the demand for new oil and gas infrastructure topped almost $8.9 billion. For investors, that represents a huge opportunity for short- and long-term growth. (Source: Sebastian, S., “Oil and gas pipeline demand to surge through 2016,” FuelFix.com, November 10, 2012, last accessed July 24, 2013.)
Since the beginning of the year, oil producers and pipelines have been performing solidly. The Amex Gold Bugs Index (NYSE/HUI) consists of 15 of the largest and most widely held public gold-producing companies. The index is down more than 42% since January 1, 2013.
The Amex Oil Index (NYSE:XOI), a price-weighted index of the leading companies involved in the exploration, production, and development of petroleum—including Hess Corporation (NYSE:HES), Chevron Corporation (NYSE:CVX), and ConocoPhillips (NYSE:COP)—is up almost 14% year-to-date.
The Alerian MLP Index (NYSE:AMZ) is a pipeline index with a market cap of $336.0 billion and is up approximately 20% year-to-date.
Investors who want to invest directly in pipeline companies could start by looking at Kinder Morgan Energy Partners, L.P. (NYSE:KMP), one of the more popular U.S. oil and gas pipeline companies. If investors want to diversify risk, they could consider the ALPS Alerian MLP ETF (NYSEARCA:AMLP), or even the UBS E-TRACS Alerian MLP Infrastrctr ETN (NYSEARCA:MLPI).
Even though some companies move their oil and gas by rail, the quickest, most efficient way is by pipeline. While the run-up in pipeline infrastructure will eventually subside, the oil boom will see that it is maximized for years to come.
This article is brought to you courtesy of John Whitefoot from the Daily Gains Letter.