Market Trend #1: America’s Energy Renaissance
Look at this chart of U.S. crude oil production. It could easily be mistaken for the rise of a hot tech stock, couldn’t it?
Click to EnlargeFracking has allowed us to unlock oil and gas reserves in places where it would have been uneconomical years ago. Amazingly, fracking is a major reason the U.S. is poised to overtake Saudi Arabia as the biggest energy producer in the entire world.
The same is true with environmentally friendly natural gas because of the discovery of shale gas in Appalachia. Western Pennsylvania has really enjoyed an economic renaissance. So have Texas, North Dakota and a number of other places throughout the country.
However, there are obstacles that make it difficult to invest in natural gas directly. Most natgas is used in winter, so you have a huge seasonal fluctuation in price. And because it’s a gas, the only practical way to transport most of it over land is through pipelines.
Rather than owning the companies that pump the gas out of the ground (“upstream” producers), I suggest you own the companies that collect the toll for transporting and processing it (“midstream” players). That is the low-risk approach to investing in this market trend, and that is a bet I’m willing to take.
Enbridge Energy Management (EEQ) and Kinder Morgan Management (KMR) are two great toll-taker energy MLPs that I have long recommended because they make distributions in stock rather than cash. Both yield around 7%. No federal or state income tax is due on your investment until you sell.
If you need current income to live on, you can sell your distribution shares. It’s a little less straightforward than cash in your brokerage account, but for many investors it is less of a hassle than dealing with an MLP’s complicated K-1 form at tax time.
Cheniere Energy Partners (CQP) is a toll taker on my watch list. The company is located in Louisiana near the Gulf of Mexico. They’re building a liquefied natural gas (LNG) plant by the riverside to convert the natural gas to a liquid and load it on to tankers for shipment overseas. Now, in the U.S., we have an oversupply of natural gas. Thus, it makes sense for producers to send it to places like England, Spain, France, Korea and India, where users are willing to pay a much better price for LNG than in the U.S.
Cheniere has four big LNG units that they call trains. Even though they are not constructed yet, the capacity of these trains is fully contracted by large foreign utilities. CQP is planning to build another LNG plant in Corpus Christi, Texas, when they finish in Louisiana.
The risk with Cheniere’s distribution is that they are borrowing the money to pay you. If anything happened to stop construction of the Louisiana plant, they’d have a problem.
I’m watching CQP until it comes down to $30 or less. At that level, my subscribers and I can both feel comfortable buying. But this is a great name to bet on America’s domestic energy boom.
