In the 1970s, the common assumption was that with inadequate domestic supplies of accessible oil and natural gas, the United States would forever have to rely on external sources for the lifeblood of its economy. How times have changed.
Today the United States is experiencing an energy revolution in which America's productivity and trade balance stand to improve meaningfully. As a result, consumers and industry may see significant cost reductions and a wide range of companies will encounter transformational growth opportunities.
Technological advances in the energy sector, particularly horizontal drilling and hydraulic fracturing, have made immense reserves of domestic oil and natural gas economically recoverable.
The technologies are likely to be game changers for the U.S. economy, with domestic oil production poised to overtake that of Saudi Arabia within five to eight years, according to the International Energy Agency.
The United States could become “all but self-sufficient” in providing its energy needs within two decades.
The implications for investors could be dramatic. Companies up and down the energy value chain stand to benefit from the shale boom.
The list begins with “upstream” exploration and production companies, which have increased spending on U.S. drilling by more than 500% over the past 10 years. Such investment has helped to transform production from resources such as North Dakota's Bakken field from virtually nothing a few years ago to daily output rivaling that of Qatar.
Oasis Petroleum (OAS), for example, an independent exploration and production firm that focuses on Montana and North Dakota, produced more than 22,000 barrels of oil per day last year, doubling its earnings in the process.
“Midstream” energy companies, which handle the transportation and storage of oil and gas, also are favorably positioned, with spending on extraction-related infrastructure growing about eight times faster than overall private- capital spending. Pipelines represent the most cost-effective method of delivery for getting oil and gas from the interior of the United States to refineries along the East and Gulf coasts.
However, America's pipeline transportation capacity hasn't kept pace with its production potential. The United States is expected to build nearly 20,000 miles of additional pipeline by 2035, so companies involved in building and operating such pipelines, such as Kinder-Morgan Inc. (KMI), the country's largest midstream energy company, could be well-placed to benefit.
“Downstream” players, such as refiners, also stand to benefit, given their ability to take comparatively cheaply produced domestic hydrocarbons, refine them and then sell them on global markets at elevated prices. Although their strong pricing power may not last, U.S. refiners should continue to benefit from cheap U.S. gas — used both as a feedstock and as a source of energy for the refining process — for a long time.
Lower input costs
The investment opportunities aren't limited to the energy sector, however. Energy-intensive industries, from steelmakers to chemical and fertilizer producers, stand to benefit directly from lower input costs.
The shale boom already has made U.S. production costs of key petrochemicals highly competitive on a global basis, which should drive additional investment in capacity, while inexpensive gas has made North America the low-cost producer of nitrogen-based fertilizer.
A range of other manufacturers stand to benefit, from makers of extraction and processing equipment to producers of natural-gas-driven truck, train and automobile engines. Consider that energy inputs as a share of gross output are among the highest in the transportation industry.
Some other potential beneficiaries might be a bit more surprising. Railways are a good example.
Given the midcontinent supply glut of oil and shale gas, and the challenge of moving such supplies to coastal refiners, rail has emerged as an increasingly important mode of energy transport. In 2009, U.S. rails moved about 277,000 carloads of petroleum products, but that number had already exceeded 382,000 by the middle of this year.
Such traffic has driven strong recent demand for tank cars, and firms such as Greenbrier Cos. (GBX) would appear to be in the proverbial catbird seat with 85% of its order backlog for tank cars.
Clearly, the effects of this energy revolution are spreading across many industries and companies, giving investors many avenues through which to gain exposure.
Art Steinmetz is president and chief investment officer of OppenheimerFunds Inc.
