It’s easy to forget that gas pump prices broached the $4 mark in some places early this year, as economic and geopolitical issues pressured the outlook for supplies.
But prices at the pump have declined sharply and the price of gas is on the back burner in the minds of many consumers now, thanks to the slowing economy and the continued boom in production of oil and gas in North America due to the widespread use of new production technologies such as hydraulic fracturing (fracking).
The U.S. Energy Department reported this week that due to new drilling in North Dakota, Texas, and the Gulf of Mexico, the U.S. is now pumping more than 6 million barrels a day of crude, up roughly a 10th since the middle of last year, and at the highest volume since 1998.
And that’s only going to continue to grow, as the agency predicts that U.S. oil production from shale fracking will increase at a 5 percent annual rate for the next few years, and Canada’s National Energy Board expects 5.5 percent growth there.
This is a significant economic trend that’s transformative for the national economy and represents an excellent long-term investment opportunity, particularly for domestic and Canadian oil and gas refiners and pipeline owners, as they’re in the sweet spot of this event.
For one thing, North American drillers are producing West Texas Intermediate (WTI) grade product, which is used as the benchmark for oil pricing in the U.S. It is an important distinction because due to its makeup, it’s much cheaper for refiners to process than the imported Brent crude, which is a combination of crude oil from 15 different foreign oil fields and, as such, is much more complex and expensive to refine.
As a result, U.S. refiners of WTI crude are getting a big cost advantage versus the imported Brent crude refiners, which turns into higher profit margins, since they can still fetch the same prices at the market for their finished product as the Brent producers, said S&P Capital IQ in a recent research note.
“We see increasing North American crude oil production as positive for refiners with refineries in the Mid-Continent and Gulf Coast,” said an S&P analyst. “We believe the location of these refineries provides them with access to the growing crude oil supply, enabling them to take advantage of lower cost (crude product).”
Another big factor in the U.S. oil and gas industry’s favor is that transport costs from the oil fields to refiners are low compared to any alternative and getting lower as more new pipelines come online near the oil fields.
S&P analysts say they expect that “higher crude oil prices and the demand for energy infrastructure will benefit storage and transportation companies” this year and next as rising oil prices, company earnings and cash flow will help boost the big oil producers infrastructure spending on transport and storage.
All this means business is booming for U.S. refiners that can handle the WTI crude as well as the pipeline companies that carry it from the far-flung oil fields to the refiners, and then on to storage and distribution sites.
In fact, the storage facilities at the nation’s oil pipeline crossroads of Cushing, Okla., where WTI prices are set daily, are near capacity, so companies that own oil and gas storage facilities elsewhere are benefiting from that surplus.
The long-term expectations are that these structural changes in the oil and gas industry will bring a new and lower normal for U.S. oil and gas prices, decrease oil price volatility, and make the nation less dependent on foreign resources.
Here are eight stocks cited by S&P Capital IQ as being poised for long-term gains based on North America's booming oil production, arranged in inverse order of analysts' most positive ratings:
8. TransCanada
Company profile: TransCanada, with a market value of $29 billion, is one of the largest pipeline operators in North America with more than 37,000 miles of natural gas pipelines. Although the U.S. government recently tabled the company’s request to build an extension to its existing Keystone pipeline (Keystone XL), which would connect Canadian and North Dakota oil to the Gulf Coast and the refineries there, that project could get approved under a new presidential administration and be completed within a few years.
Dividend Yield: 4.16%
Investor takeaway: Its shares are down 5.2 percent this year, but have a three-year, average annual return of 14 percent and a 10-year annual return of 13 percent.
Analysts give its shares two “buy” ratings, three “buy/holds,” 10 “holds,” and one “weak hold,” according to a survey of analysts by S&P. S&P has it rated “buy” with a $49 price target, which is a 20 percent premium to the current price.
S&P says: “We think its ability to boost volumes from oil sands, exploit gas opportunities and provide low-cost generation in Alberta will drive cash flow and earnings growth.”
7. Enbridge
Company profile: Enbridge, with a market value of $30 billion, owns one of North America’s largest crude-oil pipeline networks, connecting Alberta’s oil sands with refineries in the Midwest. It also owns natural gas pipelines, as well as Canada’s largest gas distribution utility.
Dividend Yield: 2.97%
Investor takeaway: Its shares are up 3.5 percent this year and have a three-year, average annual return of 31 percent, and over 10 years the annualized return is 19 percent.
Analysts give its shares two “buy” ratings, six “buy/holds,” five “holds,” and one “weak hold,” according to a survey of analysts by S&P. Morningstar says: “Enbridge’s assets produce steady cash flows with little sensitivity to volumes or commodity prices, and their regulated rates virtually ensure profitability.”
6. Spectra Energy
Company profile: Spectra Energy, with a market value of $18 billion, owns and operates major transmission pipelines, and roughly 7 percent of U.S. natural gas storage capacity. Morningstar analysts say: “Spectra is a pure play on natural gas demand. Its operations stretch across all links in the natural gas value chain, with the exception of riskier exploration and production.”
Dividend Yield: 4.03&
Investor takeaway: Its shares are down 7.8 percent this year, but have a three-year, average annual return of 21 percent. Analysts give its shares three “buy” ratings, three “buy/holds,” and eight “holds,” according to a survey of analysts by S&P.
S&P has it rated “strong buy,” with a $37 price target, which is a 33 percent premium to the current price.
5. Marathon Petroleum
Company profile: Marathon Petroleum, with a market value of $13 billion, is a refiner of gasoline and distillates which it transports and sells from the Midwest to the Gulf Coast and throughout the Southeast.
Dividend Yield: 2.64%
Investor takeaway: Its shares are up 15 percent this year. It's a 2011 spin-off from Marathon Oil. Analysts give its shares four “buy” ratings, seven “buy/holds,” and four “holds,” according to a survey of analysts by S&P. S&P has it rated “buy,” with a $49 price target, which is a 25 percent premium to the current price.
4. HollyFrontier Corp.
Company profile: HollyFrontier Corp., with a market value of $6 billion, is an independent petroleum refiner that owns and operates five refineries in the U.S. and also has a stake in pipelines and storage terminals.
Dividend Yield: 1.93%
Investor takeaway: Its shares are up 38 percent this year and have a three-year, average annual return of 48 percent. Analysts give its shares six “buy” ratings, four “buy/holds,” six “holds,” and one “weak hold,” according to a survey of analysts by S&P.
S&P says: “We continue to be positive on its asset location, which we believe gives the company an advantage given the increasing production coming from Canada and the shale plays” from the upper Midwest, as well as its ability to process heavy and sour crude oils into a high percentage of gasoline and diesel. But it expects margins to be pressured this year due to the U.S. crude glut.
3. Valero Energy
Company profile: Valero Energy, with a market value of $12 billion, is North America’s largest oil refiner and one of the biggest independent U.S. refined petroleum products retailers. It operates refineries that can process various types of crudes, which is a big competitive advantage.
Dividend Yield: 2.75%
Investor takeaway: Its shares are up 5 percent this year, have a three-year, average annual return of 9 percent and a 10-year annualized return of 10 percent.
Analysts give its shares seven “buy” ratings, three “buy/holds,” six “holds,” one “weak hold,” and one “sell,” according to a survey of analysts by S&P. S&P has it rated “strong buy,” with a $31 price target, which is a 47 percent premium to its current price. It says “the company is well-positioned to benefit from the increasing oil production from shale plays and the Canadian oil sands.”
2. Plains All American Pipeline
Company profile: Plains All American Pipeline, with a market value of $13 billion, is involved in the transportation, storage, processing, and marketing of crude oil, refined products, natural gas liquids, and liquefied petroleum gas.
Dividend Yield: 5.36%
Investor takeaway: Its shares are up 9 percent this year and have a three-year, average annual return of 27 percent. Analysts give its shares seven “buy” ratings, nine “buy/holds,” two “holds,” and one “weak hold,” according to a survey of analysts by S&P. S&P has it rated “buy” with a $90 price target, which is a 16 percent premium to its current price.
1. Enterprise Products Partners
Company profile: Enterprise Products Partners, with a market value of $43 billion, is a Houston-based master limited partnership that transports and processes energy commodities, primarily natural gas, natural gas liquids, and refined products.
Dividend Yield: 5.1%
Investor takeaway: Its shares are up 7 percent this year and have a three-year, average annual return of 29 percent and over 10 years the annual return has been 12 percent. Analysts give its shares 13 “buy” ratings, seven “buy/holds,” and two “holds,” according to a survey of analysts by S&P. S&P has it rated “strong buy,” with a $59 price target, which is a 23 percent premium to the current price.
Morningstar analysts say: “Only a handful of master limited partnerships have the asset base, liquidity position, and ability to undertake transformative projects that can generate strong cash-flow growth despite turbulent markets. Enterprise Products Partners ranks among them.”
—By TheStreet.com’s Frank Byrt
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