The Biggest Energy Problem Facing The U.S. (And How We Can Profit)

A lot of people are talking about the need to produce more energy here in the U.S. It makes sense. Domestic energy security is a good thing, after all.

There’s just one little problem…

There just isn’t enough takeaway capacity to support the incremental growth needed to meet demand. A lack of available pipeline capacity has already created severe transportation bottlenecks at times. That happens when you bring 30 million barrels per week to the surface. Moving all this oil to Gulf Coast refineries and export terminals has been a challenge.

But as you’ll often find the case with big challenges, there’s an opportunity for investors to profit, as I’ll explain in a moment.

Major Regulatory Challenges

Now, my High-Yield Investing premium readers know that I don’t like to get political just for the sake of it. But in case you haven’t noticed, it has become very difficult (impossible in some cases) to secure state and local permit approvals for new pipelines in today’s highly politicized climate.

The Keystone XL Pipeline is but one high-profile example. The proposed $9 billion expansion was intended to transport more than 800,000 barrels per day from Canada to Nebraska, where it would then link with other lines traveling to Gulf Coast refineries.

First proposed in 2008, the controversial project met with fierce opposition from environmental groups and Native American tribes and was rejected by President Obama. It was later revived by the Trump administration but then subsequently canceled by an executive order from President Biden on his first day in office. That decision drew the ire of Canadian Prime Minister Justin Trudeau and triggered a legal challenge from two dozen states.

But ultimately, the project was scrapped.

Even when governments give a thumbs-up, pipeline construction can still be stymied by injunctions and legal delays at the local level. Just ask Kinder Morgan. For years, Canadian oil producers had to settle for discounted prices because their products had no outlet to the sea and instead had to be routed south to the U.S. The lack of export pathways costs as much as $15 billion in lost revenues yearly.

Seeing an opportunity, Kinder Morgan stepped up and invested $1 billion to expand the Trans Mountain Pipeline System. This would have tripled the oil flow through the Canadian hinterlands to export terminals on the coast, where the supplies could be shipped to Asian markets. The project had the full backing of the Canadian government and provincial officials in Alberta. But British Columbia threw up roadblocks, and the project was locked in a stalemate.

In the end, Kinder Morgan was forced to sell the Trans Mountain system and walk away.

A Serious Logistical Roadblock

The difficulty has been reflected in the number of drilled but uncompleted (DUC) wells. As the name implies, this is essentially a hole in the ground that still requires casing, cementing, and fracking. The delay could be a labor shortage, but most often arises when there is simply nowhere for the oil or gas to flow.

Shortly before the pandemic struck, there were approximately 8,000 DUC wells across the Permian, the Niobrara (Colorado), the Bakken (North Dakota), the Marcellus (Pennsylvania), and other domestic shale plays.

Several new conduits have come online to alleviate the congestion. The construction of these new oil highways has helped ease some of the constraints. But all they have done is provide breathing room. Traffic is rising as well. If production continues to ramp up as forecast, it’s only a matter of time before takeaway capacity is maxed out again and the bottlenecks reappear – choking off output.

And we’re not just talking about West Texas, either. Pipeline woes have also plagued other hunting grounds, including the Bakken shale. North Dakota is rich in natural resources but lacks supporting infrastructure. As a result, billions of cubic feet of natural gas have been flared (just burned off). As for oil, drillers that couldn’t find space on local pipelines sought alternate arrangements.

Some oil was moved by truck, but that solution proved less than ideal. For one reason, the trucking convoys chewed up roads. Moving it by rail is an option, too. But at the end of the day, we simply need more pipeline capacity.

Action To Take

I could go on. But hopefully, you get the picture. Future pipeline battles will be extremely contentious (and costly). At best, they will get bogged down by injunctions and protests that can take years to resolve. Others will be abandoned altogether.

If geopolitical tensions ease, we could see some relief in oil and gas prices. But the domestic infrastructure problem will remain. Until that changes, and as long as the economic rebound from the Covid-19 pandemic continues, we will likely continue seeing elevated energy prices.

The good news is that there are ways that investors can play this angle.

Longtime readers know I’m a big fan of master limited partnerships (MLPs). I talked about MLPs and why they’re great for income-minded investors in this article.

First created in the 1980s, MLPs combine the liquidity and accessibility of common stock with the tax advantages of a partnership. They are structured as “pass-through” vehicles, but they trade on an exchange. Much like real estate investment trusts (REITs), they must distribute at least 90% of their taxable income to unitholders. As a result, MLPs don’t have to pay corporate taxes.

This means MLPs can afford to pay amazing yields — often three to four times the market average.

I shared one of my favorite names — Enterprise Products Partners (NYSE: EPD) – in this piece. But there are plenty of choices out there.

Plus, let’s face it. The likelihood of any serious competition cropping up soon is extremely low. And while that isn’t exactly ideal, it puts the existing MLPs in an enviable position.

P.S. MLPs are a great option for income investors. But if you’re looking for more growth, then I’ve found one of the best ways to profit…

I’ve found a small company focused on drilling in the Permian Basin in West Texas that’s poised to soar in the coming months.

It’s sitting on top of one of the largest finds I’ve ever seen. And by getting in now before the rumor mill picks up, investors have the chance to pocket triple-digit gains, practically overnight.

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