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U.S. could become top oil producer

Here's how investors might be able capitalize on the U.S. energy renaissance.

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The United States will supplant Saudi Arabia and Russia as the world’s largest energy producer by 2017, according to the International Energy Agency (IEA). This tectonic shift in the energy power structure could have sweeping geopolitical and economic ramifications.

While you may think that the U.S. oil boom makes all energy stocks attractive, our income fund manager thinks investors should be selective. His perspective: Look for companies that stand to benefit from an increase in oil production and can weather lower real prices.

Investing in the energy boom

Currently, the IEA estimates that the United States imports about 20% of its energy requirements. However, the independent Paris-based intergovernmental organization expects the U.S. to be a net energy exporter by 2030. Furthermore, the U.S. is forecasted to be completely energy independent soon thereafter, in 2035.

What investing implications might this energy revolution involve? Larry Rakers, portfolio manager of the Fidelity® Dividend Growth Fund (FDGFX), thinks the U.S. energy renaissance offers a number of domestic income and growth opportunities. "My favorite segments of the oil trade, right now, are gas processors and pipelines, companies that use natural gas as an ingredient—such as select chemical companies—in what they produce, and companies like engineering and construction firms that build liquefied natural gas (LNG) terminals and chemical plants," Rakers says.

Despite the obvious cause for optimism, Rakers urges investors to be scrupulous. One of the primary reasons Rakers prefers these companies, as opposed to others in the energy patch, is because he is focused on the real price of oil. "I am concerned that oil and gas prices may not keep pace with inflation, and could decline on a real basis over the next several years," he says. Considering the new supply that is assumed to be coming online from ramped-up U.S. production, lower prices are a possibility. While that would be great for consumers, it’s not necessarily the case for energy stocks.

As a result of this expectation, Rakers is investing in companies that he believes will benefit from increased volumes of U.S.-produced oil and gas, and have the ability to withstand a potential decrease in oil and gas prices. "I think investors should focus on pipeline operators, oil and gas producers, select refiners, and exploration and production companies that have access to the most productive regions where oil reserves have been identified."

Where is the oil?

While it will take a number of years for U.S. energy revival to fully play out, any investment in energy stocks requires monitoring changes in supply and demand. Rakers is keeping an eye out for any new shale discoveries in other countries and regions, as well as discoveries of offshore gas and oil fields—particularly in the Gulf of Mexico, Brazil, and the east and west coasts of Africa.

One point to distinguish about these EIA’s findings is that, while there are several shale basins with potential oil reserves around the globe, most or all of those identified in North America appear to be well understood. That is, their potential reserves are known to a greater extent and the extraction capabilities are in place.

Alternatively, the productivity of many of the other known shale basins, particularly those in less-developed regions of the world, have not been as thoroughly examined. As a result, these other basins may represent longer-term opportunities, rather than the near-term one in the U.S.

The natural gas story

One of the key segments of the developing U.S. energy resurgence is natural gas. The IEA anticipates that the U.S. will use increasingly more natural gas than oil or coal—both of which currently combine to generate an overwhelming source of domestic power production—as cheap domestic supply boosts its demand.

Soon, the U.S. will be a massive supplier of natural gas. Assuming current conditions persist, the U.S. is set to be a net LNG exporter by 2016, and a net natural gas exporter by 2020.1 A catalyst for the exportation of U.S. natural gas is how relatively cheap it is. The graph below shows the price difference between U.S. natural gas, compared with prices in Japan and Europe.

Natural gas has the added benefit of burning about 50% cleaner than coal, and roughly 30% cleaner than oil. This may be a significant factor in the adoption of natural gas as a fuel source. Of course, environmental regulation is a risk factor to be considered, Rakers points out, given the debate about accessing these reserves using the fracking process. So, investors should be aware that more regulation could be coming.

Investing implications of the potential U.S. energy boom.

With crude oil currently trading around $93 per barrel, the desire for cheaper energy sources is clearly there. Of course, prices can change rapidly. "The state of the economy is a big driver of the price of oil and gas," Rakers notes, "and these prices have a major impact on energy stocks."

A weakening global economy could push prices lower. Recall the financial crisis when the price of crude oil plunged from an all-time high above $140 per barrel in June 2008 to a multiyear low near $30 in early 2009. Alternatively, if global economic conditions firm, prices could remain stable or go higher in the coming weeks and months.

New technologies have enhanced productivity and exploration techniques, enabling companies to access newfound reserves. In the U.S., these capabilities are being employed in the productive Marcellus shale region in the eastern part of North America and the Bakken shale region in Montana, North Dakota, Saskatchewan and Manitoba, creating the possibility that the U.S. will become the world’s largest supplier of energy.

Over the short- and intermediate-term, there are a number of possible macroeconomic consequences from growing U.S. energy production, including lower prices, a jobs boost, and a reduction in the U.S. current account deficit as less oil is imported.

For investors, select individual securities, energy funds, and master limited partnerships (MLPs) may offer exposure to the emerging shift in the energy paradigm.

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1. Source: EIA, as of May 15, 2013
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