Last month, I named energy the hottest sector for 2012. Since then, I’ve received a number of emails and messages for more details on why this sector rates such an endorsement. So today, I want to dig a bit deeper and make sure you’re set for a second chance to buy into these innovative companies.
One big reason energy is the hottest sector for 2012 is because the U.S. is simply awash with oil. In fact, the U.S. ended 2011 on pace to export more gasoline, diesel and jet fuel than any other single export — including commercial jets and agricultural products like wheat, corn and soybeans.
In fact, an important pipeline that goes from the Gulf Coast to a massive storage facility in Cushing, Okla., is bursting at the seams — creating a big bottleneck. This key pipeline is now in the process of being “reversed” to send oil back to thirsty Gulf refineries. This will help further boost U.S. fuel exports, and analysts don’t expect the U.S. to lose its newfound exporter status anytime soon.
This is the first time in 62 years that the U.S. is a net energy exporter — and you better believe this fact is turning heads. There are plenty of reasons behind the shift:
- Increasingly efficient U.S. refineries
- A nearly 8% decline in U.S. consumer demand for gasoline due to more fuel-efficient vehicles and a weak economy
- New equipment at U.S. refiners that removes sulfur from diesel fuel, helping to boost exports of the “clean diesel” that Europe and other markets crave
But perhaps the biggest reason for the U.S.’s exporter status in oil is because of the fracking boom that is now producing crude oil as well as natural gas.
Trucks in North Dakota (Bakken Formation) and West Texas (Barnett and Woodford Shale formations in Permian Basin) are running 24 hours a day to transport crude oil to pipelines. Hotels in these regions are typically experiencing 200% occupancy as oil-service companies double-book rooms for employees who work 12-hour shifts. The fracking boom for crude oil is also expanding in South Texas in the Eagle Ford Shale Formation.
The good news is that this fracking boom is helping to lower gasoline prices due to the crude oil surplus and caused natural gas prices to decline 27% in 2011 due to vast shale formations in Arkansas (Fayette Shale in Arkoma Basin), Louisiana (Haynesville Shale), Kentucky, New York, Ohio, Pennsylvania and West Virginia (Marcellus Shale).
The oil-service companies that are directly profiting from the fracking boom are predominately:
- Complete Production Services (NYSE:CPX)
- Carbo Ceramics (NYSE:CRR)
- Flotek Industries (NYSE:FTK)
Two other companies that are benefiting from the boom: Mitcham Industries (NASDAQ:MIND) and RPC (NYSE:RES). The higher drilling and exploration activity is increasing demand for the equipment they manufacture.
In addition, DCP Midstream Partners (NYSE:DPM) and Plains All American Pipeline (NYSE:PAA) pay generous dividend yields in excess of 5%, so investors receive healthy dividends as well as capital appreciation.
In October, the energy stocks in my portfolio surged almost 40%. The energy sector has since consolidated a bit, but I’m expecting the combination of strong sales, earnings, low price-to-earnings ratios, high dividends (for pipeline companies) and the price of crude oil climbing past $100 per barrel to lead to a resurgence in my energy holdings.
The ride higher will be bumpy, but the trend here is firmly up. Keep in mind the roller-coaster ride that we experienced in 2011 — chaos in the Middle East culminating with the Libyan uprising, a stronger dollar and euro-zone contagion fears. I expect this volatility to continue in 2012. We’ve already seen drama as Iran blusters and threatens to block the Strait of Hormuz, where a third of the world’s oil tankers pass.
By holding the best-of-the-best oil companies through these oscillations, you can be sure that it will only be a matter of time before your oil-related holdings surge higher as investors bid up shares.
To prepare for the coming profit wave, I have three new stocks with powerful near-term catalysts that I want you to snap up now — including two that are great buys in the energy sector.
You can find all three here.