The recession is over, the stock market continues rallying to all-time highs, the U.S. economy is squarely in a phase of growth, and domestic oil production is indisputably a major driver of this growth. The U.S. oil industry is now ranked third among countries worldwide and should surpass Saudi Arabia by 2018 according to the International Energy Agency. During the last five years, the price of oil has doubled, as have shares of many U.S. companies equipping and servicing the oil industry.

  • The iShares U.S. Oil Equipment & Services ETF has doubled in five years.
  • The SPDR Oil Equipment & Services ETF has tripled in five years.
  • The PowerShares Oil Services ETF has doubled in five years.

I want to own stocks in this sector for the long haul. Major companies are happy investing billions into the sector, with capital expenditures in the U.S. oil industry increasing 16.7% last year alone. Barclays predicts 8.5% growth this year to $156 billion. To list just one example, Warren Buffet will spending a record $5 billion this year to upgrade carts on his Burlington Northern Santa Fe railroad to meet demand for transporting oil.

In 2005, 60% of U.S. oil consumption was imported. Since 2007, however, the U.S. switched into a net exporter. Today, more than 60% of U.S. oil consumption is produced domestically. Reducing consumption of foreign oil has already saved the U.S. billions. At a daily production rate of 8 million barrels of oil, the U.S. is the third most productive country in the world. The U.S. Department of Energy expects that rate to rise to 9.6 million barrels per day by 2019, a 22% increase from current levels. Consumption of foreign oil relative to domestic oil continues to shrink favorably, as illustrated below by the U.S. government.

Indeed, domestic oil production is growing at the fastest rate since the 1800s, mostly due to new applications of fracking and horizontal drilling. The number of U.S. crude oil barrels produced is at its highest nominal level since 1988. As I mentioned above, the International Energy Agency predicts that U.S. oil production will surpass Saudi Arabian oil production by 2018. This is clearly a sector with long-term potential, and I am comfortable owning the right stocks for years to come.

My top pick: fracking in the Western U.S.
For the sixth consecutive year, fracking and horizontal drilling were the most commonly cited drivers of growth among oil industry companies surveyed by Barclays. Boomtowns in shale oil regions like Williston, North Dakota, exemplify the power of the domestic oil industry exploiting these types of drilling. Central states along the Mississippi River like Texas and North Dakota are already major shale oil producers, and companies in that area are generally expensive because of broad awareness. As a value investor, I am personally looking at Western states that still offer cheap opportunities.

Nevada and California are the newest entrants to the fracking industry. Nevada just issued its first fracking permits last spring, with California following suit a few months later. There are no operational fracking drills in either state, but I am comfortable investing in pre-production companies. I currently have two stocks that I am actively considering: Noble Energy (NBL) and TransCanada (TRP -0.30%).

To briefly explain my rationale for these picks, I like Noble Energy because it will almost certainly be the first company to frack Nevada. It also provides plenty of diversification from its massive gas fields in Pennsylvania, Colorado, Wyoming and Texas, not to mention sizable international operations. A $25 billion blue chip stock with an affordable forward P/E of 18, Noble Energy is my favorite domestic oil company with near-term fracking operations in the western U.S. 

Lastly, as a macro play on fracking infrastructure throughout the country -- including western states -- I am looking to buy shares of TransCanada with a holding timeframe measured in years. The largest oil pipeline company in North America, revenue at this toll giant hit record highs last year of $8.3 billion, continuing to increase a staggering $250 million annually. A few weeks ago, TransCanada opened the southern link of its Keystone XL pipeline from Oklahoma to the gulf coast of Texas. With continuous spiderwebbing of its oil pipeline across North America, TransCanada will be transporting fracked oil for many decades to come. As the U.S. becomes the world's leading oil producer by 2018, I will participate in this growth through unavoidable pipeline tolls.