Investing in Pipelines: The Fix for America’s Energy Dilemma
America is the world’s premier energy producer. 2017 marked its seventh straight year as the leading energy producer.
Natural gas and oil production is up 60% since 2008. This boom in energy is offering opportunities … and obstacles.
The chart below shows the emergence of the U.S. as a leader in energy production.
The American Energy Opportunity
America’s surge in energy output is thanks to shale basins, like the Permian in Texas and the Marcellus in the Northeast.
As shale forms, it traps gas and oil into tight formations. Drillers use hydraulic fracturing to shatter the rock with extreme pressure, releasing the trapped energy.
These reserves are in high demand. The U.S. exports about 40% of its oil and roughly 8.5% of its natural gas.
Oil’s role as the leading fuel for transportation is well-known. There’s a bigger growth story in natural gas.
America, Europe and China are investing in a future where electricity comes from gas. I’ve written before about how natural gas burns much cleaner than coal and emits almost no particulate matter.
With global demand mounting for a cleaner energy source, America has a strong market for its energy reserves.
The Problem: An Energy Dilemma
This growth in energy production hit on the heels of a bear market in energy. Major producers spent years cutting costs following the crash in oil prices in 2015.
These are the same companies that invest in infrastructure, like pipelines, to transport energy.
The current network of pipelines doesn’t have enough capacity to move energy to refiners, offshore exporters or end users. That means oil and gas are ending up in storage or on costlier transports like rail.
Imagine any city that went through a rapid growth phase. Traffic jams and congestion clog up the roads and slow down everyone’s productivity. Energy is facing the same dilemma.
Energy trades at a discount from this congestion, cutting into profits.
The fix to America’s energy dilemma is simple: Build more pipelines! The Energy Information Agency expects the addition of billions of cubic feet per day of natural gas capacity this year. By year end, capacity will be three times as much as in 2014.
Building these pipelines is going to be expensive. Luckily, America offers a tax-advantaged structure for companies that form to take on these tasks.
Master Limited Partnerships (MLPs) get huge tax breaks by funneling cash back to shareholders as “return on capital.” This adds incentives for major producers to fund these projects but everyday Americans can get in on the action, too!
MLPs also offer huge yields. The Alerian MLP ETF (NYSE: AMLP), which is a basket of MLPs, offers an 8% yield! Compare that to the paltry 1.7% yield of an S&P 500 Index fund.
News about changes to tax rates on interstate energy transportation rattled the sector. Shares fell roughly 20% through March.
All the bad news that is coming to this sector has arrived. We have a great opportunity to lock in an 8% yield with plenty of upside potential. A 20% to 30% run up in share price brings us back to 2017 highs when energy prices and production were lower than today.
Consider adding the AMLP ETF to your portfolio for exposure to America’s strengthening energy position.
Internal Analyst, Banyan Hill Publishing