This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Darius McDermott, managing director of Chelsea Financial Services and chairman of the Association of Independent Discount Brokers, discusses the investment potential in fracking.
Investors looking to benefit from the fracking boom in the US have three main options - buying stocks, buying an energy fund or buying a US equity fund.
When it comes to stocks, there are multiple choices. Pipelines is one. These are a less risky way to play the theme as they are not dependent on striking oil. There has been a 50% rise in US production in the last three years and the gas needs to be moved to refineries and terminals.
Companies that operate the pipelines will be winners. Kinder Morgan Pipelines and Semgroup are popular holdings.
Oil services companies are another way. They have been hit in recent years as margins have been squeezed on North American onshore business - when shale gas took off in 2010, too much capacity was created and US gas price fell from $5 to $2.
When the US starts exporting liquefied natural gas (LNG) in 2015, the excess capacity will be soaked up. Schlumberger, Haliburton and Baker Hughes are three big global oil services companies.
And then there is exploration and production companies like EOG Resources. Their primary focus is the Eagle Ford well in Texas and Bakken in North Dakota. Forecasters predict that they will grow US onshore production 30% year on year to meet demand. They believe that with further technological improvement they can improve the recovery rate of resources from 8% to 16%.
When it comes to energy funds we like the Investec Global Energy fund which has about 50% invested in US stocks. It is not for the cautious investor however - as it can be a volatile fund.
JP Morgan Natural Resources also has about a third of the fund invested in energy stocks, half of which are from the US. This fund also invests in gold and materials however, so other themes can have a big impact on performance.
A lot of US equity funds have some sort of play on the shale gas theme. Analysts rate the Miton US Opportunities fund which launched earlier this year and has around 14% invested in shale gas stories. The manager is very clear on how he invests to benefit the most from this theme (pipelines and oil services being the main areas) and has a good detailed knowledge of the sector.
Another fund Chelsea Financial Services have on the buy list is, AXA Framlington American Growth fund, which has investments in exploration and production companies with good acreage positions and, importantly, years of drilling inventory ahead.
As fracking technologies improve, they will also benefit as costs will be driven down. The manager of this fund also likes railways as they will also be involved in moving the oil and gas.
Interesting facts
- The US is currently the third largest energy producer in the world behind Saudi Arabia and Russia. By 2020 it could be top.
- Two thirds of the US trade deficit is due to energy imports. If they get energy independence this trade deficit will all but disappear - and the dollar will appreciate significantly. UK investors will get the extra currency uplift on their investments then.
- Interestingly, it is currently illegal to export crude oil from the US - has been since the 1970s. There are moves afoot to change this. but it's not illegal to export refined products, hence why exports of petrol have increased in the US recently.
