Oh, the things we do to save money on gas! Have you ever driven around the neighborhood looking for the cheapest station? Do you have one of those discount cards that gets you $0.05 off on the third Tuesday of the month?
Any way you shake it, no one likes to pay at the pump. Yet there's one tried and true method to get money back from your gas purchases: Own the companies that bring you gasoline. Why let all of those dollars you spend on gasoline simply burn up in your engine when you could be getting some of that money back from the companies that found it, made it, transported it, or sold it to you?
Let's look at three simple investment strategies that will take that money going into your tank and put it back into your pocket.
1. Sell the shovels so others can dig for oil
From the beginning, oil exploration has been a speculator's game. While some drillers made it big, several others lost their shirts. Today, drilling has become much more advanced, and the chance of finding oil is much better, but there's still no guarantee that oil will be found at every well.
What every well does have, though, is drilling equipment. And what better time to be in the oil-services industry than 2013? The exploration and production industry plans to spend a record $644 billion in capital expenditures to drill for new resources. And with some market projections showing that oil could go as high as $250 a barrel by the end of the decade, this trend will probably continue for quite some time.
Of all the companies in this space, one stands out among the rest as the one-stop-shop for everything drilling equipment and services: National Oilwell Varco (NOV -1.63%). From simple replaceable parts such as drill bits to complex deepwater drilling ships, National Oilwell Varco is the world's largest supplier of rig equipment, with a market share of about 60%.
Those who got in early with NOV have been richly rewarded. The company's share price is up more than 1,000% since its initial public offering in 1996, and 500% over the past 10 years. In addition, it issued its first quarterly dividend in 2010 and has raised it by 30% since. Granted, NOV's 0.8% dividend yield looks pretty small when compared with industry giant Schlumberger's 1.8% yield, but the new technologies for shale drilling give NOV plenty of room to grow both its income and its dividend.
2. If oil needs a ride, help take it there
A large part of the success of the recent U.S. energy renaissance has hinged on our energy infrastructure. When all of this new oil and gas started coming out of the ground, we didn't have enough pipeline to support it. Slowly but surely, midstream energy companies have picked up the slack and laid thousands of miles of pipeline to keep oil and gas flowing smoothly across the United States. With so much added production yet to happen, the Oil & Gas Journal expects $38 billion to be spent on new pipelines in 2013 to keep pace with demand.
What makes investing in oil and gas pipeline companies lucrative is that they're relatively stable outfits with predictable revenues. Most of these companies have supply contracts for several years, and so the cash flows from those contracts can be assumed with a large amount of certainty. Building out new pipelines can be very capital intensive, but the capital to maintain those pipelines is considerably smaller. So many of these companies have leftover cash flows that they return to shareholders through large distributions.
If you want to capture value from gasoline in this part of the value chain, look no further than Kinder Morgan Energy Partners (NYSE: KMP). The company and its operating arm Kinder Morgan are the largest independent transporters of finished products in North America. As with NOV, investors who have ridden with Kinder Morgan Energy Partners through thick and thin have seen the company grow more than 1,400% since the 1993 IPO, and it has more than doubled in the past 10 years. The company has also steadily raised its dividend for the past 15 years and sports an impressive 5.8% yield.
3. Help turn water into wine -- or, in this case, oil into gasoline
We can't just pull oil out of the ground and put it in our tanks. There are very elaborate and complicated methods involved in refining oil into the various products we use. Today, thanks to all these new sources of energy and a strengthening pipeline infrastructure, oil refiners have the pick of the litter when it comes to buying crude feedstocks. Many have begun to replace expensive imports such as Brent crude with less expensive options such as oil from the Bakken region of north Dakota or Canadian oil sands, while at the same time gasoline prices have stayed relatively high. HollyFrontier (HFC) and Phillips 66 (PSX -2.82%) have consequently their best income margins in several years.
Both of these companies' share prices have done extraordinarily well as of late. Since Phillips 66's IPO last year, the company is up 83%, and HollyFrontier is up 56% over the same time frame. While both are great options, they provide different opportunities. Much of Phillips 66's refining capacity is in the Gulf of Mexico, so the company sees an immense opportunity to refine crude here in the U.S. and export it to premium markets such as South America and Europe. It hopes to be exporting up to 375,000 barrels per day by the end of this quarter. Conversely, HollyFrontier's refineries are all smack-dab in the middle of the youngest oil plays in the United States. Since most of these shale plays don't have adequate pipeline infrastructure away from them, HollyFrontier could be one of the only outlets for these new oil sources, and therefore a cheap crude source.
What a Fool believes
The oil and gas industry is a long and complex web, but the overall product is pretty simple to understand. These three investment ideas are a decent starting point for investors looking to get into the energy space, but your due diligence shouldn't stop here. Very successful investors will look at the prospects for a company several years from now and plan to hold those companies for the long term. Let us help guide you though the decision-making process by checking out our premium research report on Kinder Morgan. It will give you a much better sense of what's coming for this energy stalwart. While it may be the largest finished product transporter in North America, there's still a los coming down the pipe for this company -- pun intended.