by Aaron Levitt | March 25, 2014 2:12 pm
As we’ve noted countless times before, the fracking revolution has completely changed the game for America’s energy sector. Energy companies continue to use the technique along with other advanced horizontal drilling methods to unearth a huge abundance of oil and natural gas.
In fact, the U.S. has quickly overtaken Russia as the number one producer of natural gas and could possibly pass Saudi Arabia in terms of oil production in the near future.
That surge has made many energy firms the stocks to buy as this production growth has taken hold. It also creates an interesting and potentially expensive problem: the need for more infrastructure.
In order to move and process all of this immense bounty, we are going to need plenty of new pipelines, fractionators and other pieces of energy logistics. Building all of this vital infrastructure is going to cost a pretty penny and take years to complete.
That means some of the best stocks to buy could be the firms doing that heavy lifting and construction.
North America’s energy landscape is currently a crisscrossed map of distribution bottlenecks, broken connections and pricing discrepancies. Eliminating those issues is key to even begin thinking about using our newfound bounty.
At the same time, the bulk of America’s new sources of plentiful supply are coming from areas that have not historically been known for energy production. Areas such Michigan’s Antrim shale and Ohio’s Utica are becoming hotbeds of production. To take advantage of and gather these unconventional resources, new pipelines and infrastructure must be built.
Adding in new liquefied natural gas (LNG) export terminals and various processing plants so that we can actually use what we produce bumps the amount of needed infrastructure up even further. And building all of this won’t be a cheap undertaking. No, it’s actually going to be very expensive indeed.
According to an updated study by consultancy group ICF International, America will need to spend roughly $30 billion per year on new midstream infrastructure through 2035. That’s about 3 times the amount that ICF predicted at the start of the shale boom and equates to a monster $641 billion in total spending on pipelines, pumps and gather facilities.
Let that number sink in for second — $641 billion.
The key is attaching all of the new and upcoming shale fields into our current pipeline network. For example, despite being one of the most prolific producing regions in the country, producers in North Dakota’s Bakken continue to ship their product via more expensive rail cars rather than pipelines.
At the same time, the majority of natural gas in the region is flared off during production as there is no ways to get that product to market. ICF predicts that nearly 35,000 miles of new transmission pipelines will be need to be built as well as 303,000 miles worth of gas gathering lines in order to connect fields like the Bakken and Marcellus to trunk lines.
Overall, ICF estimates that this amount of spending will be critical to helping North America’s energy boom move forward. Without it, the movement’s potential will be constrained.
That’s why the stocks to buy could be the construction and engineering firms that focus on building energy infrastructure. Here are three of the best stocks to buy for America’s upcoming infrastructure boom:
While it’s not based in Chicago and it doesn’t build bridges, Chicago Bridge & Iron Company (CBI) could be one of the best energy infrastructure stocks to buy for building out America’s shale boom. The firm is a petrochemical construction powerhouse and has been involved in a variety petroleum-related projects — including the design and construction of some of the world’s largest onshore and offshore pipeline projects, LNG facilities and refineries.
CBI has been racking up new contracts like crazy. The latest include a $6 billion LNG export facility contract with Sempra Energy (SRE) and a $100 million contract to build pipelines & propane dehydrogenation unit for Enterprise Products Partners (EPD).
Those hefty contract wins, plus the forward P/E of just 14 — make CBI one of the best stocks to buy.
Spun-off from oil service stock Halliburton (HAL), KBR (KBR) could an interesting “value” pick for building outAmerica’s energy boom.
Like CBI, KBR specializes in a variety of oil and gas infrastructure projects — including LNG and gas-to-liquids (GTL) facilities. However, unlike CBI stock, KBR has recently run into a bit of trouble lately.
The firm reported terrible earnings and KBR stock sunk nearly 13.5% on the news. Currently, KBR stock trades for cheaper forward P/E than CBI, and it sports a higher dividend at 1.2%. At the same time, KBR continues to gain new contracts in the midstream and downstream segments of the energy markets. It has posted recent wins in oil sands processing as well as new natural gas-based fertilizer units.
Despite its recent troubles, KBR is still one of the better stocks to buy if you want to play the prospective infrastructure boom.
While it isn’t as big as KBR or CBI, MasTec (MTZ) is quickly becoming of the best energy stocks to buy. Shares of the construction firm recently hit 10-year highs.
MTZ continues to diversity away from its traditional core construction market of electric transmission and telecomm work. Its new focus has been pipelines, pipelines and more pipelines. Recent buys of private and smaller midstream-focused rivals has made MTZ into a pipeline specialist.
Those buys have translated into some serious earnings and profit growth at the firm. Oil & gas operation revenue jumped a whopping 103% during the last reported quarter.
Meanwhile, MTZ’s backlog of new projects jumped 23% versus last year to stand at $4.1 billion. That backlog of new midstream and pipeline projects is currently greater than the firm’s market cap. All in all, MTZ is small. But the small stature could make it one of the best energy stocks to buy in today’s market.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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