How to Profit from the Surge in Domestic Oil Production
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How to Profit from the Surge in Domestic Oil Production
Crude oil has pulled back from its recent price strength, but it’s still holding up pretty well above the $100.00-per-barrel mark for West Texas Intermediate (WTI).
Energy is still a top sector for equity portfolios, but it is the case that many oil stocks have already moved up tremendously and valuations are a little stretched.
I’m a big believer in energy infrastructure and pipelines for income-seeking investors and junior energy stocks for risk-capital investors.
It’s more difficult to find value in this market; that’s for sure. But domestic oil and gas production, transportation, and storage remain a growth industry.
Halliburton Company (HAL) just reported another great quarter, with its oil and gas services still being pretty robust worldwide.
In particular, Halliburton’s management noted solid strength in the U.S. market for energy services, and that’s on top of several tremendously good years in recent history.
According to the company, 2014 second-quarter sales came in at $8.1 billion, up solidly from first-quarter sales of $7.35 billion and comparative second-quarter sales of $7.32 billion last year.
Recent quarterly revenues were a new record for Halliburton, with notable strength in its North American operations. In fact, domestic operations are so strong that management plans to immediately add new equipment, transportation capabilities, and work crews for hydraulic fracturing.
The company’s operating margins are rising (internationally, as well), and the board just increased its share repurchase authorization by a huge $4.8 billion to $6.0 billion in total.
Halliburton’s share price is up 40% year-to-date, and I’d say there’s a good probability the position is going higher yet, as it’s not overpriced for double-digit growth.
The company’s stock chart is featured below.
Chart courtesy of www.StockCharts.com
The oil business is a good one, and while some operations go in and out of favor with institutional investors, there is still near- to medium-term opportunity stability in domestic production growth and related infrastructure.
One business I like for income-seeking investors is Kinder Morgan Energy Partners, L.P. (KMP), which is a master limited partnership with a current yield of just less than seven percent. (See “Two Steps to a Solid and Profitable Portfolio.”)
What I like about this partnership is its track record of increasing payments to unit holders. In its most recent quarter, Kinder Morgan increased its quarterly distribution to $1.39, which represents a five-percent increase over the second quarter of 2013. This is the 52nd occurrence of increased distributions to unit holders since new management took over in early 1997.
Domestic oil and gas infrastructure is a good business to be in, likely for the rest of this decade.
Pipeline companies are also strong contenders for income portfolios; at a lot of these companies, revenues are not related to oil or natural gas prices. Longer-term contracts are common within the industry, and it makes for a good business model when domestic oil production is on the rise.
Of course, the oil and gas business is cyclical. It always has been and always will be. And there will be shocks to the system that are way beyond your control, especially regarding geopolitical events.
This is why I’d say stick with those oil and gas companies that have large domestic operations. Oil infrastructure, which includes transportation, pipelines, and storage, offers a solid business model for the next several years.
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