It's official... the United States is about to become the largest energy producer in the world (if it's not already).
According to the Energy Information Administration (EIA), the U.S. is currently producing about 22 million equivalent barrels of oil and natural gas a day -- up from 18 million barrels in 2008. While no one knows the actual figures for Russia (the largest producer for the past several years), estimates out of Moscow are forecasting the country will produce 21.8 million barrels a day in 2013.
Think about that for a second...
Just five years ago, lofty energy prices in the U.S. nearly crippled the state of the overall economy. Back then there was so much demand for energy -- and such little supply -- that companies like Cheniere Energy (NYSE: LNG) were working day and night to build natural gas import terminals to take advantage of cheaper prices overseas.
Today, the landscape in the American energy market has completely changed. Thanks to new developments in horizontal drilling and hydraulic fracturing ("fracking"), the U.S. has unlocked waves of oil and gas reserves that were once thought unrecoverable.
As you'd expect, the optimism surrounding this "shale boom" has made American energy stocks some of the best places to put your money over the past several years.
But can the rally continue?
For the answer, we look to Dave Forest -- StreetAuthority's resident commodity expert and Chief Investment Strategist for Scarcity & Real Wealth. As Dave said in his August issue of Scarcity & Real Wealth:
The cheers of joy for the energy sector -- and the ever-growing valuations I see this excitement translating into -- have recently given me pause.
That's because -- generally speaking -- the best investment opportunities come in sectors people are not excited about.
I don't see a lot of people saying that in energy today. In fact, many buyers seem to be clamoring to own a piece of the next big shale play -- at the next big price. There's a lot of focus on the growth potential of these companies (which admittedly has been explosive), and little talk of the risks involved with growing capital costs and infrastructure bottlenecks, not to mention unproven decline curves.
As Dave notes, one of the biggest concerns facing the industry right now are rising production costs -- especially those related to unconventional shale plays like the Marcellus shale in New York and the Eagle Ford in Texas.
According to research and consulting firm Sanford C. Bernstein, the marginal production cost for domestic drillers has risen to $114 a barrel this year -- up from $89 in 2011. Most of the increase is attributable to the expensive outlays for unconventional recovery methods like "fracking."
The steep costs are already putting pressure on the profitability of companies operating in the energy sector. According to Bernstein, publicly-traded oil companies have recently reported some of the lowest profit margins of the last ten years.
To make matters worse, the lofty crude prices that have been supporting the industry for the past several months are starting to reverse. In the past 8 weeks, oil prices have fallen 14.5%... from over $110 a barrel (WTI) in September to $94 today.
That's one reason Dave is trimming down the oil and gas holdings in his Scarcity & Real Wealth portfolio. Specifically, Dave sold Chesapeake Energy (NYSE: CHK), Whiting Petroleum (NYSE: WLL) and Range Resources (NYSE: RRC) at the end of August due to growing concerns about the economic feasibility of their shale assets.
That's not to say there isn't any upside left in this corner of the market though. As you'd expect, some companies will have an easier time navigating these headwinds than others... with the best being those that are insulated from rising production costs.
But that said, if you really want to profit from the "American Energy Boom," we recommend you avoid exploration and production companies altogether. After all, this story has been going on for quite some time now... chances are most of the "big money" has already been made here.
Instead, there's another "game-changing" event unfolding in this corner of the market... and if we're right, it could make early investors a fortune.
Low Gas Prices Mean Big Profits For This Tiny Company
Simply put, we're talking about natural gas.
Since the "American Energy Boom" began several years ago, the massive supply glut in natural gas has pushed prices into a prolonged bear market.
While that's bad news for businesses that actually pull the stuff out of the ground, it's great for companies like natural gas engine maker Westport Innovations (Nasdaq: WPRT).
Now if you've never heard of Westport Innovations before, chances are that's about to change. That's because this company has the potential to completely revolutionize the way we think of transportation. In fact, my colleague Andy Obermueller is so optimistic about this company's business line that in his most recent report, "The 11 Most Shocking Investment Predictions for 2014," he predicted this company could make the gasoline engine obsolete.
The key is the company's patented technology that turns massive, thirsty diesel engines into cleaner-burning and more fuel-efficient natural gas engines. According to Andy, one of the company's newly-designed 12-liter engines can match the output of the most powerful diesel engines on the road today.
This is no science experiment either...
As Andy said in his most recent report, "The 11 Most Shocking Investment Predictions for 2014:"
Westport has already produced thousands of engines, and has been investing heavily to double or even triple its output in coming years.
You can see the company's expanding reach by looking at the income statement. Westport already managed to triple sales from 2007 through 2012, to around $155 million, and analysts expect sales to rise nearly 20% in 2013 to around $185 million. Yet the stars are aligned for a knockout punch in 2014, as Westport sharply boosts production... sales are expected to rise a hefty 40% next year.
Those growing sales volumes are one reason Westport stock has been on a tear lately... In the last five years, the stock has returned more than 445% -- boosting the company's share price from $4.15 a share in 2008 to nearly $23 today.
But those gains could just be the tip of the iceberg. According to the International Monetary Fund (IMF), gas prices could remain between $4 and $5 for at least the next five years -- maybe even longer.
That's good news for Westport... the longer natural gas stays cheap, the more incentive consumers have to buy the company's cleaner burning engines.
However, there is one caveat. Due to the company's aggressive R&D spending, right now Westport is operating in the red. For fiscal year 2012, the company reported an operating loss of $107 million. But analysts expect that to change in 2014, as growing sales volumes should push the company toward profitability.
While you could wait for that day to come, chances are you'll be late to the party. After all, the key to investing in "game-changing" stocks is to get in on the ground floor. If what Andy is predicting is true, and natural gas engines become norm, then this is one trend you'll wish you had invested in early.