The Oil Slick

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by: Mark J. Grant

There is lots of talk about technology and what it is doing to various companies. The discussion generally settles on the cloud or the internet or the FANG stocks. However, sitting over in the corner, and generally not thought about much, is perhaps the most important technological breakthrough of the last twenty years, which lies at the heart of the boom in American energy.

I speak here of shale oil and fracking and re-fracking and horizontal drilling which has changed America from being an energy dependent nation to becoming an exporter of oil and natural gas. In doing so, we have rocked the world, with OPEC dwindling in importance, as each week passes. There is no question that the OPEC nations are holding on for as long as they can, and trying desperately to maintain their position, but I do not believe they will be able to do so over the long term.

Think of it, the United States has been held hostage for more than fifty years by the OPEC nations, and their brethren, and now we are in the process of breaking free from their energy domination. I would say, in general, that we are not doing a very good job in how we will proceed as a nation and that the country needs an energy policy that includes not only the use of our energy resources for financial gain but also includes a methodical strategy for dealing with some of the nations that support terrorism that lie within the OPEC ranks.

On June 21, 2017, WTI was at $44.81 and we stood at $67.91 Friday morning. That is a 34% gain in price in the last nine months. Many oil and natural gas fields that were not profitable last year are profitable now and the future looks brighter and brighter for American energy. With American production surging to unprecedented levels, as OPEC continues curbing output, the U.S. is on course to be the top exporter of crude and oil products in 2019, Citigroup (NYSE:C) said in an April 25 note. I agree, we are set to be the largest oil and natural gas producer in the world soon and now we must, in my opinion, come up with a serious plan on how to export, to whom to export, and how to leverage our new found wealth.

OilPrice.com states,

U.S. oil exports just hit a record high, a sign that the shale boom will continue to lead to higher shipments abroad, despite some infrastructure bottlenecks. Last week, the U.S. averaged 2.3 million barrels per day in crude oil exports, the highest average for any week on record. The surge in exports is being driven by several factors. The most obvious is the rapid growth in U.S. shale production, with shale drillers adding new supply at a blistering rate. Record production is leading to record exports.

I would state that all of the talk about tariffs, on such things as aluminum and steel, pale next to what we could do with our oil and natural gas reserves, if the government were to get serious about the ways that we could use them. I would further state that the Department of Defense should be involved in these discussions as there is a lot that could be done economically, before rolling out tanks or battleships or putting our young men in the line of fire. We desperately need, in my view, a national energy policy and we need it as soon as possible.

This situation is also creating long-term investing opportunities, in my estimation. Whether it is bonds or stocks or energy ETFs or closed-end MLP funds, there are some financial gems now that can be mined, in my view. I am particularly fond of some of the energy bonds now which have outsized spreads, that have not been fully valued by the markets, in my opinion. Some of the pipeline companies are at the top of my list, as they will benefit as more oil and natural gas rolls through their systems. Think of a toll road, it is the same idea, as they collect more fees as American energy is exported to the world.

The same line of thinking also draws me to some of the closed-end MLP funds where very competitive yields may be found. Many of these funds were hit by the recent FERC ruling but that was caused, in my opinion, by not understanding the ruling. In the first place, FERC stated that the ruling may not go into effect until 2020, which leaves plenty of time to adjust the contract provisions. It turns out that there are a myriad of ways to contractually get around the FERC decision and plenty of time to put them in place, before the FERC ruling gets enforced. In fact, I would state that the FERC ruling was "much ado about nothing" when fully considered in a thoughtful manner.

The markets, without question, had a knee-jerk reaction to the ruling but I think you can still take advantage of the short-sightedness of what occurred. Some of the closed-end funds pay monthly and have outsized yields and I find the pipeline ones to be a good opportunity for investment. They are complicated, and require some serious homework, as you examine the net asset value, the leverage, the composition of the assets and the yield but the examination is worthy of your time, in my estimation.

Opportunity knocks. You might want to think about opening the door.