The U.S. energy sector has been on a roll in recent years, led in particular by Texas. New fracking technologies have breathed life into the domestic oil and natural gas sectors. Following many decades of declining production, this resurgence has led to job creation and boosted many ancillary industries and local economies. Investors who believe in the sustainability of this recovery will want to consider different ways of riding this wave of activity.
Rising Demand for Fracking-Based Energy
Growing instability in energy-exporting countries has reinforced the demand for energy supplied by fracking technology. Long-term peace remains elusive for the Middle East. Meanwhile, civil unrest and factional infighting continue to plague oil-exporting countries like Libya, Nigeria, and Venezuela. The recent successful U.S. seizure of a rebel oil tanker serves as a stark reminder that Libya, holder of one of the world’s top-ten proven oil positions, is locked in a political stalemate that has seen its oil exports shrink to a small fraction of its historical levels.
Russia’s annexation of Ukraine’s Crimean peninsula has significant ramifications for the natural gas market. If higher prices or full economic sanctions take effect, Europe may need to find alternative sources for nearly one-third of its annual natural gas consumption. Barring an extremely unlikely reversal of Russia’s recent actions, its economic ties with Western countries will likely continue to get colder, and the kremlin may look to pivot toward Asia.
Cyprus and the U.S. have already been named as potential candidates to help offset Western reliance on Russian natural gas. Although U.S. regulatory approvals of new liquefied natural gas export facilities remain very slow, the recent surge in geopolitical instability will likely add to the support for constructing new facilities. At the very least, the U.S oil and natural gas industries ought to enjoy greater domestic demand, and continue to expand.
Although new construction will require many years before the full impact can be felt, investors should not take a passive approach to this trend. If world affairs continue along their current trajectory, U.S. oil and natural gas infrastructure may potentially see substantial amounts of additional public and private investment dollars.
Investors, however, should not just go out and randomly buy up shares of oil and natural gas producers like Anadarko Petroleum (APC) and Chesapeake Energy (CHK), or even integrated oil and gas companies such as Exxon Mobil (XOM - Free Exxon Mobil Stock Report). Although these companies have merit as standalone investments, those hoping to capitalize on the ideas in this article may be disappointed. Fracking-based production involves high operating costs and also faces the challenge of high depletion rates. Until new technologies are developed to alleviate these factors, profit growth will be pressured.
Another way to invest in the U.S. energy boom involves targeting companies that have a more focused and defined exposure to actual infrastructure development and construction. Companies like Foster Wheeler (FWLT) and MasTec (MTZ) play a large role in building new facilities and rehabilitating existing infrastructure. Additionally, drilling and oilfield services companies such as Halliburton (HAL) and Schlumberger (SLB), should see demand grow over the foreseeable future as the energy sector continues to expand.
Suppliers of concrete and other building materials that target energy-producing regions ought to experience solid top-line growth over the next 3- to 5-years, too. Among these, Eagle Materials (EXP) and Texas Industries (TXI) have done particularly well of late. Investors should also look at suppliers of specialized components used in the fracking industry. For example, CARBO Ceramics (CRR) provides ceramic proppant, a key ingredient that is injected into shale reservoirs. Moreover, as efforts to export liquefied natural gas ramp up, companies like Air Products (APD), a leading provider of LNG technology and equipment, should see strong growth.
Other industries will also benefit from a continued surge in the U.S. energy sector. Abundant supplies and suppressed prices should help keep margins favorable for chemical businesses that use natural gas as a feedstock. Too, as new facilities and businesses sprout up, staffing companies will see above-average demand from these revitalized areas of the country. Among these, engineering and staffing services provider, CDI (CDI) has recently won some significant Texas-based projects, and is worth a closer look. Investors should also consider REITs such as UDR (UDR) and Camden Property Trust (CPT). As job growth improves in markets like Texas, rental demand will likely strengthen over time.
New fracking technologies have provided the U.S. with an economic shot in the arm. Recent geopolitical developments have strengthened the case for even greater domestic oil and natural gas production. Investors who believe in the staying power of this trend have many ways to increase their exposure to this ongoing growth story. Before investing in this bullish outlook, however, subscribers should check out our in-depth coverage of these stocks in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.