How to Build the Ultimate Portfolio For The U.S. Oil and Gas Boom

For a targeted yet diversified energy portfolio to ride the boom in U.S. oil and gas production, look no further than these ETFs and large-cap players.

Jan 14, 2014 at 4:25PM

At this point, there is no denying the energy revolution happening in the U.S. Among other things, 2013 was the year the U.S. surpassed Russia to become the largest producer of oil and natural gas in the world.

The trend may be massive and indisputable, but it's also new and requires a fresh perspective when building a portfolio.

Changing times require changing tactics
In the past, the fear of "peak oil" led most investors to look to holdings that would capitalize on static or decreasing supply that would pressure prices higher. In the U.S. today, though, the investment landscape is being defined by increasing supply as a result of fracking and other advanced extraction technology.

To find winning companies, think in terms of cubic feet
With increasing supply, investors should look to securities that will benefit from a boost in volume rather than prices. Toll collectors, in essence. 

One such exchange-traded fund that can do this is the iShares Transportation Average (NYSEMKT:IYT). The thesis here is simple, and it's one that led Warren Buffett to purchase Burlington Northern Sante Fe outright back in 2009. As increasing amounts of oil and gas are extracted from the ground, someone must transport that raw product to the refineries and then end users. Railroads in particular stand to gain handsomely from an increase in volume, regardless of the market price of a barrel of oil.

For those looking for an investment in a specific stock instead of the diversified ETF, the iShares Transportation ETF points to Union Pacific (NYSE:UNP), its largest holding at slightly more than 12%. 

Approaching this thesis from a different angle, we can look to the companies building the infrastructure to allow for an increasing volume of extraction. These companies build refineries, pipelines, and transportation infrastructure. The Industrial Select Sector SPDR (NYSEMKT:XLI) is a good proxy for these companies. 

The companies that make up this ETF are weighted toward very large, diversified conglomerates, with General Electric (NYSE:GE) and United Technologies (NYSE:UTX) leading the way. Companies of this size have the capital, the technology, and the expertise to deliver the required infrastructure at scale. 

While absent from the top 10 holdings of the Industrial Select SPDR, Kinder Morgan (NYSE:KMI) is a diversified, well-managed, and energy-focused company that is strongly positioned to prosper over the next several years.

U.S. oil and gas is here to stay
The U.S.' rapid ascension to the upper echelons of world energy producers took many by surprise. But after decades of oil dependence, the surge in oil and gas volume is breaking those shackles. Investors should allocate a portion of their portfolio to this sector; my personal preference is a targeted, yet diversified, approach with the ETFs and large-cap stocks above.

The story will be driven by volume; now is the time to start thinking in terms of cubic feet.

More stocks for the American energy bonanza

Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of General Electric Company and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers