3 Unexpected Plays on Shale Oil

Over the past several years, the shale oil boom has resulted in a shift in balance of power in the energy industry and significant gains for many of the major players in the region. This far into such a run, there is always the risk that much or most of the upside has already been realized. Often the best way to capitalize on a booming industry is to find indirect investments that will benefit from the boom, but that might not have entered the public spotlight. Below are three stocks that will continue to benefit from expanding shale operations.

One of the biggest challenges to shale operations has been transporting the product that comes out of the ground to accepted delivery locations in the absence of comprehensive pipeline systems. In 2012, crude oil shipments away from pipelines spiked by 256%, seeing 167 million barrels move in almost 234,000 freight cars. Those companies that aid in this process have built-in growth for the foreseeable future. This can include rail and trucking operations, but the examples below drill down even further.

American Railcar (NASDAQ: ARII  ) is one of the larger players in the manufacture of freight cars, and is well positioned to benefit from increasing demand for car that can aid the transport of oil and gas from the major shale regions. At the late July earnings release, the company beat earnings expectation of $0.82 per share, reporting $1.11 per share, but missed revenue expectations of $170.46 million, reporting $159.4 million in revenue. The stock carries a 2.7% dividend yield, and appears to be on a solid upward performance trajectory. The stock trades at a price-to-earnings multiple under 10, and given its solid growth prospects – driven largely by the industry profile – the stock looks undervalued. As an indirect play on the shale oil and gas boom, American Rail is worth a look.

Trinity Industries (NYSE: TRN  ) is one of American Rail's main competitors, but it is larger and seeing sizable gains in key metrics. At the recent earnings release, the company saw earnings jump 7% on a year-over-year basis to $1.1 billion, while earing slept nearly 24% to $84 million. In the last year, Trinity has grown revenue by an aggregate of 79%. While the company's dividend yield is less than that offered by American Rail, Trinity increased its dividend by 22% last year and there is room for more expansion. Trading at a P/E of 11.1, the stock is priced slightly higher than American Railcar; this is largely justified by its higher growth and significantly larger market cap, which lends additional stability. The potential for dividend yield growth is another attractive feature. The company is properly placed to benefit from the continued expansion of shale operations and offer a great indirect option for investors. Between these two options, Trinity is more attractive overall, but, for now, American Railcar is a more attractive dividend play.

Ryder System (NYSE: R  ) recently unveiled a new logistics and transportation initiative dedicated to the energy sector. In addition to the problem of transporting product out of the shale fields, equipment management and general logistics issues can represent a significant cost to such operations. A recent report from Zacks suggests that customers are expected to reduce pickup and delivery delays by 50%, see a 30% reduction in fleet equipment costs, and realize a 20% uptick in load efficiency. There is much more to Ryder than this business segment, and when you consider that the Dow Jones Transportation Index is up roughly 18% this year, exposure to the broader sector is favorable. With a P/E of around 13, well below the industry average of 18, the stock looks like a solid value play. Given the fact that the company's play on the energy sector is new, it is unlikely that this is priced into the stock. This play represents a significant growth opportunity that should not be overlooked.

Ultimately, each of these three companies is positioned to benefit from the boom that continues in shale oil and gas. By looking beyond the direct players, you can often gain an edge. Missing these types of opportunities would not be in the tradition of being a true Fool.

Even with the shale boom, oil prices have continued to rise. Think the days of $100 oil are gone? Think again. In fact, the market is heading in that direction now. But for investors that are positioned to profit from the return of $100 oil, it can't come soon enough. To help investors get rich off of rising oil prices, our top analysts prepared a free report that reveals three stocks that are bound to soar as oil prices climb higher. To discover the identities of these stocks instantly, access your free report by clicking here now.


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  • Report this Comment On August 23, 2013, at 2:40 PM, pjmetz wrote:

    "At the recent earnings release, the company saw earnings jump 7% on a year-over-year basis to $1.1 billion, while earing slept nearly 24% to $84 million."

    You might employ an editor, as "earing slept" makes no sense.

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