Booming production of oil and gas from major shale formations has altered the calculus for American energy independence -- and virtually overnight. In 2005, the United States reported net imports of crude oil and petroleum products of 12.5 million barrels per day (bpd). In the last four weeks, net imports shrunk to an average of just 3.2 million bpd.
That puts the elusive goal of energy independence firmly within reach. In fact, the U.S. Energy Information Administration's Annual Energy Outlook 2018 projects that the United States will become a net energy exporter by 2022. That's pretty amazing, especially since the prior year's report pegged that event at 2026.
While barreling toward energy security is great for the United States, it also could be a gold mine for investors.
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It's really happening
To be fair, the term "independence" is a bit of a misnomer. That's because the United States is still actively participating in the global markets through energy exports. Rather, the term more accurately describes the country's newfound energy security and bargaining power when it comes to international trade (see: recent events). In other words, if we experience any geopolitical shocks, then America will be largely above the fray when it comes to satisfying its appetite for energy. Few other major economies can say the same thing.
Call it whatever you want, but it's happening. American petroleum exports -- defined as crude oil, ethanol, gasoline, petroleum coke, liquefied natural gas (LNG), and various other gases and liquids derived from dinosaur sauce -- more than doubled from 2011 to 2017 to reach 6.3 million bpd. In the fourth quarter of 2017, exports averaged 7.2 million bpd.
Exports of crude oil and liquefied natural gas, both of which only really began in 2016, reached 18% and 22%, respectively, of total petroleum exports last year. Crude oil exports averaged 1.1 million bpd in 2017, while LNG export capacity will more than double by the end of 2019.
These numbers show up in trade data, too. Uncle Sam's annual net trade of energy-related products improved by a staggering $214 billion from 2010 to 2016 -- the only of one dozen trade categories to report an improvement in that span. Considering current growth projections and the fact that America's energy-related trade gap shrunk to just $59 billion in 2016, petroleum exports provide the single greatest opportunity to improve the country's overall trade imbalances.
Turns out, the same trends are cooking up some great long-term investing opportunities as well.
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Overnight trend, long-term investing dream
There are investing opportunities upstream and downstream in the energy sector, from producers to exporters and every stop in between. Here are a few leading energy stocks in each category.
Energy producers: EOG Resources (EOG -0.48%) is one of the leading producers of crude oil from American shale plays. It may also be among the smartest. The company, which boasts positions from Eagle Ford to the Bakken, prioritizes return on capital, rather than outright growth, and refuses to drill wells that will be unprofitable. That has treated provided shareholders with robust returns in recent years, and should continue to get better in the near future.
The company expects to deliver up to $1.5 billion in free cash flow in 2018 with crude oil prices at $60 per barrel. That's largely because shale crude is light crude, which is highly coveted in the global market, especially considering most countries outside of the United States don't have the refining infrastructure to cost-efficiently process heavier crudes. Crude oil exports are the perfect market trend for EOG Resources.
The company will also invest at least $5.4 billion in expansion this year to boost oil production by 18% and reduce its debt by at least $350 million. Strong operations will allow EOG Resources to increase its dividend 10% this year. All in all, the company is a leading American oil producer and exporter for investors to consider.
Pipeline operators: If EOG Resources is among the smartest oil producers, then Enterprise Products Partners (EPD 0.18%) might just be the smartest pipeline operator. While the company is a master limited partnership, it has always maintained conservative operations compared to most of its peers. That's because it has historically accumulated more cash flow than it distributes, allowing it to fund more of its expansion out-of-pocket than peers, which have had to dip into finance markets more often.
The result: Shares of Enterprise Products Partners have proven more resilient during the recent energy downturn. The dividend currently yields 6.5%. And although management has halved its planned rate of quarterly distribution rate increases through the end of 2019 (to fund a higher portion of its expansion projects), growth projects coming on line in the next few years are expected to deliver ample earnings growth once ramped up.
Those projects focus heavily on export infrastructure, specifically for removing America's glut of liquefied petroleum gas (LPG) and ethane from oil and gas production. A flood of those products has dropped their prices well below that of naphtha, which has provided an important source of diversification and risk-management for global petrochemical manufacturers.
These projects will come online between now and 2020, after which they'll deliver incremental earnings and cash flow growth. In other words, this pipeline stock could be firing on all cylinders in a few years' time.
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Refiners: Growing exports and international appetite for light crude allowed American refiners to turn in a record year in 2017. Warren Buffett's largest energy holding, Phillips 66 (PSX -2.51%), certainly did its part for Uncle Sam. The company took advantage of a range of factors -- including a busy summer driving season, a direct hit on America's leading refinery base from a hurricane, and reduced output from traditional global producers -- to deliver a 17% share-price gain to investors last year.
While it's unlikely for the same set of favorable conditions to repeat in 2018, Phillips 66 can still piggyback on growing volumes of American energy exports. In the fourth quarter of 2017 it completed a 50% expansion of export capacity at its Beaumont Terminal in Texas to a whopping 600,000 bpd of petroleum exports. The company plans to increase the facility's total storage capacity 44% from the end of last year, which will need to be accompanied by further export capacity expansions, too. Other facilities in the portfolio export LPG, gasoline, and various other refined products.
The degree of success from year to year may very well be determined by the crack spread, or the price difference between crude oil and refined petroleum, but exports should make success the most likely long-term outcome.
LNG exporters: A single company dominates any discussion of American LNG exports, and that company is Cheniere Energy. By the end of 2019, the United States is expected to boast an astonishing 9.5 billion cubic feet per day (Bcf/d) of LNG export capacity. Cheniere Energy will own roughly 4.5 Bcf/d of that total.
The company's shares may not trade at the most attractive prices, and the balance sheet is riddled with debt, but LNG market fundamentals come pretty close to ensuring that the business will be a cash cow for decades to come. Some 88% of the company's production is entered into long-term contracts at fixed prices. Nonetheless, investors may be more interested in Cheniere Energy Partners (CQP 4.48%) -- and its 7.1% dividend yield -- to capture the immediate rewards of the Cheniere universe of companies.
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American energy independence is a game-changer
At the turn of the century, any talk of American energy independence would have been dismissed outright. But hydraulic fracturing has proven to be an exponential technology -- and has delivered nearly exponential growth for a range of production and export metrics. Considering that most projections estimate the American energy boom is only at the halfway mark of its expected peak, there's plenty left in the tank, which is why investors may want to pay closer attention to the long-term opportunities in the sector.
