How to Profit from the $1 Trillion Energy Bonanza
With all of the talk recently about the Federal Reserve, QE-infinity, the "Fiscal Cliff" and a possible slowdown in 2013, it's understandable that most investors' minds have been on precious metals. Not only do they typically serve as safe havens during uncertain times, but they've also enjoyed great runs during the past few years.
But that doesn't mean energy has to be left behind.
Crude oil, which was selling for $75 per barrel back in the summer, returned to near triple-digit territory before falling back recently. Some of that run-up can be credited to events like supply disruptions following Hurricane Isaac or threats from Iran to close the strategic Strait of Hormuz shipping lane.
But it wasn't until Ben Bernanke spoke, announcing yet another round of monetary easing, that benchmark West Texas Intermediate (WTI) prices breached the $100 per barrel level.
It goes without saying that $100 oil would have producers around the world opening their checkbook. The higher prices climb, the more economic incentive to invest in new expansion projects that boost production and reserves.
Even before this advance, oil and gas execs at the world's leading companies were already planning to invest huge amounts of cash this year.
Research firm Global Data just forecast that industry capital expenditures will top the $1 trillion mark for the first time in 2012. That's a healthy 13.7% increase from the $916 billion that was spent last year.
Typically, only sovereign governments deal in numbers that contain 13 zeroes. But then again, Exxon Mobil (NYSE: XOM) does have a budget larger than the gross-domestic-product (GDP) of some small nations.
State-owned national oil companies (NOCs) such as China Petroleum & Chemical (NYSE: SNP) and Brazil's Petrobras (NYSE: PBR) are expected to account for roughly half of the industry's expenditures. But from the biggest NOC to the smallest independent exploration & production outfit, almost everybody is upping their spending plans.
To use an example from within my Scarcity & Real Wealth newsletter, tiny Magnum Hunter Resources (NYSE: MHR) spent $268 million on exploration in 2011 and plans to invest a total of $375 million in 2012. That's a 40% spending increase, with most of the cash being directed at drilling opportunities in Texas' Eagle Ford and North Dakota's Bakken shales.
From a geographic standpoint, $230 billion of that $1 trillion will be spent hunting for oil in the Middle East and Africa. I expect West Africa to be particularly busy, considering production has doubled during the past decade to 1.6 billion barrels per day from 843 million per day.
But the biggest outlays will come closer to home. North America is expected to account for $254 billion of the $1 trillion in capital expenditures -- or one quarter of every dollar. That's not only the biggest piece of the pie, it's also the fastest growing (up 15.7% from 2011).
We can thank the shale explosion for that. Foreign giants struggling with declining output overseas are finding hotspots such as the Utica Shale in the northeast U.S. irresistible. These unconventional reservoirs are brimming with hydrocarbons, and deep-pocketed producers such as Norway's Statoil (NYSE: STO) are spending big to plant their flag.
Action to Take --> There are many ways to profit from all this, but I've got my eye on a select few areas.
Some of these capital expenditures will be spent on refinery maintenance and midstream equipment, but the lion's share is earmarked for upstream projects -- the pursuit of new energy sources and the development of those fields.
That means drillers, fracking crews and other oilfield service providers will have plenty of work orders to fill. As activity heats up in liquids basins, costs continue to trend upward. That's bad for the payer, but not for the payee.
I see "payees" like driller and pressure pumping specialist Patterson-UTI Energy (Nasdaq: PTEN) as a key recipient of all this. The stock is an attractive buy for investors looking to benefit from the relentless pursuit of new energy sources without the day-to-day commodity price volatility.