5 Funds to Play U.S. Oil Dominance

by Aaron Levitt | November 15, 2012 6:30 am

oil barrels 185 flickr 5 Funds to Play U.S. Oil DominanceIt seems that the rest of the world is finally paying attention to the energy potential of the U.S. — something we’ve been highlighting here at InvestorPlace for over a year.[1]

More specifically, people have been paying especial attention to a recent report by the International Energy Agency (IEA). The think tank reported that the U.S. will overtake both Russia and Saudi Arabia to become the world’s top oil producer by 2017[2].

Overall, the U.S. is expected to pump 11.1 million barrels of oil a day in 2020 and 10.9 million in 2025 — figures that are higher than forecasts for Saudi Arabia[3] for those years by about 500,000 and 100,000 barrels a day, respectively. Crediting the steep rise in shale oil and gas production, the agency predicts the U.S. will become energy self-sufficient and a huge exporter of hydrocarbons.

There’s certainly plenty of evidence that supports the IEA’s position. Production continues to rise, and advanced drilling techniques pull more oil and natural gas out of each well. Crude imports have fallen by roughly 11% this year, and the U.S. is on track to produce the most oil since 1991[4].

All in all, the continued progress in U.S. energy is certainly a bullish sign for investors. Plus, the recent slide in the stock market offers the perfect opportunity to load up on shares in the energy patch. A great way to add that exposure is through broad-based energy exchange-traded funds. Let’s take a look at five of them:

iShares Dow Jones US Energy Fund

iShares185 5 Funds to Play U.S. Oil DominanceSince IEA’s forecast focuses on the U.S., it stands to reason that a broad U.S.-based energy ETF should be at the top of the list. So, here it is: the iShares Dow Jones US Energy Fund (NYSE:IYE[5]).

The fund tracks 88 different U.S. oil and natural gas producers including heavyweights like ConocoPhillips (NYSE:COP[6]) and Exxon Mobil (NYSE:XOM[7]). Additionally, the ETF includes a roughly 25% weighting in the oil service and refining sectors[8], making it a balanced and appealing fund for U.S. energy dominance.

That growing dominance has been reflected in the share price of the fund. Since its inception in 2000, the ETF has managed to produce a 9.14% annualized total return. Not too shabby, considering the broad market has been flat during that time. Add in a cheap expense ratio of 0.47% as well a dividend yield of 1.61% — which is decent for the sector — and investors have a great way to play the future of U.S. energy.

Market Vectors Unconventional Oil & Gas ETF

VanEck 5 Funds to Play U.S. Oil DominanceAccording to the IEA, the net increase in global oil production will be driven entirely by unconventional resources, and the U.S. will be the single biggest contributor to the shale oil, natural gas and natural gas liquids markets.

Already, shale regions like the Bakken, Eagle Ford and Marcellus[9] are leading production in the U.S. That means betting on the firms tapping these regions could be in order.

The Market Vectors Unconventional Oil & Gas ETF (NASDAQ:FRAK[10]) tracks a basket of firms involved in shale, coal-bed methane and oil-sands extraction. While the oil sands are located in Canada, many of the firms that operate there also have a plethora of U.S.-based assets and will participate in the nation’s energy growth. Top holdings include Eagle Ford kingpin EOG Resources (NYSE:EOG[11]) and Devon Energy (NYSE:DVN[12]).

While the fund has struggled to gain popularity — it only has about $17 million in assets and trades only 11,000 shares a day — it still offers a concentrated portfolio of some of the best unconventional resource names on the planet. Plus, it only costs you 0.54% in expenses.

PowerShares Dynamic Oil & Gas Services Portfolio

PowerShares185 5 Funds to Play U.S. Oil DominanceWith production from “legacy” and mature fields declining rapidly, unconventional assets will continue to be the go-to resources for many E&P firms. However, tapping them requires some real technological know-how and specialized equipment[13].

Providing all of that equipment and technology falls to the vast oil services sector, where business is booming. After all, Halliburton (NYSE:HAL[14]) makes money no matter what E&P firm is fracking what.

While there has been a slowdown[15] recently due to lower energy prices and fewer rig counts, the services sector will see great long-term profits as hydrocarbon demand continues to grow. For investors, the sector could one of the best ways to bet on the growth in unconventional shale plays.

One of the best ways to add broad exposure is through the PowerShares Dynamic Oil & Gas Services Portfolio (NYSE:PXJ[16]). The fund’s mandate and 30 holdings cover the wide spectrum of oil services — including independent drillers, field equipment, engineering and construction, and geophysical data — for a mere 0.63% in expenses.

ALPS Alerian MLP ETF

AlerianMLP185 5 Funds to Play U.S. Oil DominanceAll across the country, pipelines, petroleum storage tanks and switching terminals help move energy from the wellhead to processing facilities. Big dollars can be made in supplying and owning that infrastructure[17]. These profits will continue to grow for investors as new critical energy infrastructure is needed to tap all of those unconventional wells.

Investors can use the ALPS Alerian MLP ETF (NYSE:AMLP[18]) to own some of the biggest pipeline and gathering firms in the business — like industry stalwarts Kinder Morgan (NYSE:KMP[19]) and Boardwalk Pipeline Partners (NYSE:BWP[20]) — through their master limited partnership units (MLPs).

MLPs have grown in popularity as their tax structure[21] allows them to distribute income that avoids the double taxation corporate dividends suffer. Additionally, the ETF provides this access without some of the dreaded MLP tax complications like K-1 statements.

That focus on the MLP infrastructure gives AMLP its appealing yield of more than 6%.

First Trust ISE-Revere Natural Gas Index Fund

FirstTrust185 5 Funds to Play U.S. Oil DominanceFinally, the IEA estimates that demand for natural gas will increase by 50% worldwide, jumping to 5 trillion cubic meters by 2035. In the U.S., the sheer abundance of the fuel[22] and low prices will help gas overtake oil to claim the largest share of our energy mix during that time. That will certainly help pad the profits of those firms focusing in on the fuel.

The best way to home in on that opportunity still resides with the First Trust ISE-Revere Natural Gas Index Fund (NYSE:FCG[23]). Featuring a virtual who’s-who of natural gas producers like Range Resources (NYSE:RRC[24]) and Southwestern Energy (NYSE:SWN[25]), the ETF’s 30 holdings are a great way to play the IEA’s energy outlook.

While the fund has suffered in the face of historically low natural gas prices, the long-term picture remains rosy for investors.

As of this writing, Aaron Levitt didn’t own a position in any of the aforementioned securities.

Endnotes:
  1. for over a year.: http://investorplace.com/hot-topics/energy-independence/
  2. top oil producer by 2017: http://investorplace.com/2012/11/u-s-to-become-biggest-oil-producer-by-2017/
  3. forecasts for Saudi Arabia: http://www.reuters.com/article/2012/11/12/iea-oil-report-idUSL5E8M9CI120121112
  4. most oil since 1991: http://investorplace.com/2012/11/jack-welch-may-be-crazy-but-not-when-it-comes-to-natural-gas/
  5. IYE: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYE
  6. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  7. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  8. refining sectors: http://investorplace.com/2012/10/murphy-oils-split-should-cheer-investors/
  9. Marcellus: http://investorplace.com/2012/11/a-far-more-muscular-marcellus-shale-beckons/
  10. FRAK: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRAK
  11. EOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=EOG
  12. DVN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVN
  13. specialized equipment: http://investorplace.com/2012/09/3-plays-in-frackings-secret-ingredient/
  14. HAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAL
  15. slowdown: http://investorplace.com/2012/09/get-ready-for-a-fourth-quarter-sale-on-energy-stocks/
  16. PXJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PXJ
  17. supplying and owning that infrastructure: http://investorplace.com/2012/10/3-income-pumping-pipeline-power-players/
  18. AMLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMLP
  19. KMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMP
  20. BWP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BWP
  21. tax structure: http://investorplace.com/2012/10/the-irs-gives-energy-investors-a-gift/
  22. abundance of the fuel: http://investorplace.com/2012/10/how-to-play-the-progress-in-natural-gas/
  23. FCG: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCG
  24. RRC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRC
  25. SWN: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWN

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