Tap These Domestic Energy Plays

 | Jan 25, 2012 | 12:30 PM EST
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A key theme of the president's State of the Union address last night was the continued need for greater domestic oil production. Indeed, according to the U.S. Energy Information Administration, domestic oil production in the U.S. has increased by 14%, to 5.8 million barrels per day, during the first three years of the Obama administration.

Over the past three years, Brent crude has risen from $50 per barrel to more than $100 per barrel today. A gallon of gasoline in the U.S. sits near all-times highs. To be sure, the U.S. benefits in a number of ways from producing its own oil. But at the end of the day, it's likely that other parts of the world will be able to produce a barrel of oil much cheaper than we can here.

If the current administration is re-elected, the energy sector and its segments will likely enjoy a favorable tailwind, at least in the short-term. Energy security, whether or not it makes sense from a capitalistic standpoint, equals national security. Also, over the past several years, small deposits of oil or natural gas on an individual's property has been a boon for both the landowners and energy companies.

Major U.S oil companies with deep pockets are starting to notice this domestic boom and are getting back in the game. For many investors, the attractive yields and valuations offered by U.S. big oil is an intelligent play. While domestic production may be a top policy goal, the profit motive of capitalism still makes international oil exploration and production very attractive effort after all, investors want rising share prices. Government policies may cause a jolt in stock prices, but in the long run, earnings and cash flows sustain an increasing stock price. With a 3% yield and a P/E of 8, Chevron (CVX) is a quality issue to consider, as is ConocoPhillips (COP) with its near 4% yield.

Energy MLPs, however, are a fertile place to tap for quality investment plays on this domestic theme. BreitBurn Energy Partners (BBEP) yields nearly 9%, while Linn Energy (LINE) yields 7.5%. Both companies have high-quality assets with a very strong hedge book that shields most of their production from the vulnerability of energy price shocks.

Natural gas seems to be America's sweet spot at the moment; the country has tons of it and it is cheap. While giant producers like Chesapeake Utilities (CPK) have recently announced plans to curtail production, cheap natural gas is an attractive energy source in this economy. If more and more natural gas starts moving, pipeline owners stand to be big beneficiaries. One of the biggest, Kinder Morgan Energy Partners (KMP), will likely be moving most of the natural gas in this country. KMP shares yield more than 5%.

One speech certainly does not dictate my investment approach, but I do consider investment themes. The biggest underlying theme from the current administration's focus on energy is that higher energy prices will likely be a global reality. Higher energy prices bode well for the industry, especially for the lower cost producers, many of whom happen to be the big names in town.

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