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How to Tap the Energy Boom

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Odds are that the U.S. energy renaissance now under way will continue for some time. That means investing in energy companies should bring a bountiful result. But the menu of possibilities is dauntingly large. What works best? One answer: natural gas and an investment vehicle called a master limited partnership.

The explosion in domestic oil production is hard to miss. It has turned nearly empty prairie states and sleepy Midwestern and southern towns into burgeoning centers of the nouveau riche. While the process of hydraulic fracking and horizontal drilling still has many environmental and ecological questions outstanding, the booming supply of oil and natural gas is, without question, an investment opportunity.

The U.S. is on schedule to surpass Saudi Arabia as the world’s largest producer of oil. In fact, the abundance of oil reserves is now prompting many in the oil and gas industry to ask the Obama administration to lift the four-decade-old ban on U.S. crude oil exports, and the government recently it on a certain type of shale oil. This ban was a Nixon era response to the 1973 Arab oil embargo.

Today, U.S. companies and investors are actively moving their dollars into all areas of the energy sector from direct investments and merger and acquisition activity, oil and gas equipment leases, exchange-traded funds and mutual funds focused on energy firms, and private real estate investment trusts focusing on the energy sector.

But master limited partnerships (MLPs) exposed to the build-out of crude oil infrastructure, continues to benefit. The surging U.S. onshore crude oil production supports continued volume growth for crude oil-levered MLPs, and also provides a wealth of infrastructure investment opportunities to satisfy producers’ needs to get their oil product to market.

Now MLPs, in this low yield environment where the best rated bonds and certificates of deposit are not enough for investors, offer strong yields in the 4%-7% range, as well as tremendous upward growth potential too. While many people dismiss some of them as too exotic or speculative for their portfolios, that opinion has changed as investors have become more educated about their potential.

MLPs range from pure pipeline investments to midstream oil companies, transportation companies (truck and rail), to equipment suppliers that make the hydraulic drills, to the chemical companies including some environmental clean-up firms. These investment strategies give investors multiple opportunities to be a part of the entire U.S. domestic oil echo system.

Let’s look at the numbers. Classic economics holds that softening demand holds back short-term price jumps in retail gasoline. That is, the price of a fill-up climbs to a ceiling, where consumers simply decide to cut back on their driving. As demand drops, prices finally follow. But that is not happening now because of global forces, which underscores the massive nature of the energy-surge trend.

What will the energy market look like in 20 years? According to energy expert Daniel Yergin, carbon-based fuels – natural gas, oil and coal – will only slightly decrease their share of the world’s energy needs, dipping from the current 82% to 75% to 80%. But coal demand will shrink dramatically, and natural gas will be king.

So natural gas looks like the best long-term play. Natural gas, right now, makes up around 31% of domestic fuel production, versus 22% for oil and 26% per coal. By 2014, says the Energy Information Administration, gas will move up to 38%, with oil at 20% and coal at 22%.

Thanks to fracking, there is a surplus of natural gas in the U.S., which has pulled prices down. Long term, though, higher demand should buoy gas prices. American power plants and industrial producers are increasingly turning to gas because it is cleaner and less harmful to the climate.

The world appetite for energy – especially clean energy – is surging. Analysts projectthat global energy needs will be 50% higher in 2030 than now, with the economies of China and India spurring 45% of the increase. Many economists and Wall Street analysts have become quite bullish about the long-term outlook for energy investments. As the world is a global village, our gas prices are most influenced by the world oil market.

Oil is more important elsewhere than in the U.S. We are using less imported oil and gasoline, but China and India and other emerging economies are using more. In fact, Chinese buyers bought more than 20 million cars last year, up 14%, the first time a nation has hit that volume.

Bottom line: Energy overall is in a bullish phase that seems likely to last for a while.

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