The new American energy boom is one of the most exciting macro developments of our lifetimes. Non-conventional drilling and extraction methods — such as hydraulic fracturing, or “fracking” — have unlocked a century’s worth of oil and natural gas that was previously unrecoverable, setting off an investment boom unlike anything we’ve seen in the United States for over 100 years.
We’re talking about the reversal of a 30-year trend that will upend global trade flows and rewrite the geopolitical map. And shrewd investors can take advantage now, before the rest of the public catches wind of this megatrend.
Based on the most recent government estimates, the U.S. now has nearly two-and-a-half quadrillion cubic feet of natural gas that is recoverable. That number is almost so big as to sound nonsensical, but as new deposits are discovered, I expect this number to tick even higher in the coming years.
You need look no further than Ukraine to see how important it is that the United States pursue not only energy independence, but also energy export capability. Russia was able to seize Crimea and launch a proxy war in eastern Ukraine without any significant response from the West. This isn’t the 1980s, and it’s not that Europe and America fear Russian nuclear missiles: They fear that Russia will turn off the gas tap and create the biggest energy crisis since the 1970s!
As we saw in that decade of stagflation, high imported energy prices can bring the U.S. and European economies to their knees.
Another strategic concern is U.S. trade policy and the imbalances created by America’s persistently high current account deficits. The U.S. consistently imports more than it exports (even during recessions!), which means that we flood the world capital markets with dollars. Those dollars, for lack of anywhere else to go, flow back in the U.S. Treasury market.
All else equal, chronic trade deficits should cause the dollar to lose value over time and should lead to domestic inflation. But worse — and returning to the theme of geopolitical risk — they have the effect of making the U.S. a debtor nation to regimes that aren’t always the friendliest. Are you comfortable with China being America’s loan shark? I know I’m not.
Abundant cheap energy means at least a partial solution to the imbalances that have plagued the United States for the past two decades. Cheaper energy, lower trade deficits and less need to get entangled in the political affairs of oil-exporting nations are all major positives. And at a time when ordinary consumers face tight budgets, reducing a nondiscretionary expense like energy means more money available for discretionary spending.
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Big Opportunity in American Energy Stocks
But profiting from this theme can be tricky. Energy prices are volatile, and even if you have the long-term direction right, you can get killed by short-term price fluctuations. Speculating in the oil and gas market is a one-way street to an early heart attack … or at the very least an ulcer!
My favorite low-risk way to play this long-term macro theme is by buying the pipeline infrastructure that transports the oil and gas. The most popular way to do this is via master limited partnerships (MLPs), which are tax-efficient vehicles that tend to throw off very high dividends. They’ve been an excellent asset class over the past decade, recent volatility notwithstanding.
But rather than recommend MLPs, I prefer what I like to call “MLPs on steroids” — the general partners that control the MLPs and take a disproportionate amount of the profits.
General partners are compensated for their efforts via what is known as incentive distribution rights (“IDRs”). Under a typical IDR arrangement, the GP is incentivized to grow the cash distribution to limited partners by taking an ever-greater share of the increase; the higher the GP boosts the cash distribution, the more of it they get to keep for themselves, though it usually caps out at around 50%.
If you are a long-term investor looking for growth and income, the GPs will generally be the way to go, as their faster dividend growth rates make them more attractive as growth investments. Also, unlike MLPs, GPs can be safely held in an IRA or Roth IRA account without generating complicated tax headaches.
There are several good GPs to choose from. One I particularly like is Williams Companies (WMB). Williams is undergoing a restructuring that will see it emerge as a “pure play” general partner with leveraged exposure to one of the biggest and highest-quality underlying MLPs — Williams Partners (WPZ). Though Williams has already enjoyed a nice rally in 2014, I expect it rise by another 50%-100% over the next 12-18 months.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
