“How a critical component of the energy market is set for a huge run-up later this year” —
The historic shale boom is making a mint for energy industry service providers.
From hydraulic fracturing to pipelines to rail transportation, the flow of oil and gas in America has flung the profit doors wide open for midstream companies.
Just take a look at the charts of some of these midstream oil and gas stocks…
Indeed, investors are cleaning up with midstream stocks.
What’s more, because these companies are smack dab in the middle of the energy supply chain, they have relatively less exposure to the stomach-churning commodity price swings — a benefit to any investor looking to mitigate oil price risk.
But tread carefully.
After such a run-up, many stocks in the midstream sector are now fully valued — if not overvalued.
So how do we take advantage of the midstream money machine without buying at the top?
It just so happens that I’ve identified another middleman that’s benefiting from the US energy explosion: oil tankers.
The rise in US oil and gas production is a boon for oil tanker trade around the world.
In fact, oil tanker trade is growing at its fastest pace in a decade, according to the Financial Times.
You see, with domestic oil and gas production booming, the US market isn’t the lucrative cash cow it once was for oil-rich exporters.
Countries from West Africa and Latin America are now being forced to seek out new destinations to offload their supply. And that means racking up some serious extra mileage to reach energy-thirsty countries like China and India.
For those who aren’t aware, the main benchmark for the oil tanker market is metric ton-miles, which measures the amount of oil volume traded per distance traveled.
A recent report by Icap Shipping indicates that a record 7.8 trillion metric ton-miles were logged in 2012 – nearly 10% more than the previous year.
What’s interesting is that the total volume of oil being moved has remained flat year over year – rather, it’s the amount of mileage logged that’s climbed significantly.
In other words, revenues generated from distance traveled are helping to make up for a stall in product sales.
Meanwhile, US oil imports have declined to their lowest level in two decades, according to the EIA.
Clearly, global energy trade has been flipped on its head now that one of world’s biggest oil and gas consumers is becoming self-sufficient. That’s great news for oil transporters who have been on an ongoing decline since the global recession took place.
Few companies have fared as well, but thanks to America’s record fuel output, margins for seaborne energy transportation looks to be back on the rise.
Some of the companies that I’m very optimistic about include: Tsakos Energy Navigation Ltd. (TNP), Frontline Ltd. (FRO), and Overseas Shipholding Group Inc. (OSGIQ).
By some accounts, including Frontline’s, the tanker market has reached rock bottom.
Analysts at Barclays Capital estimates that oil demand in China will grow by 5% this year, reaffirming its position as the world’s largest oil importer.
Should crude demand remain elevated in markets like China, the bounce back for oil tankers may come sooner than expected.