Shale Shall Prevail

 | Dec 24, 2013 | 11:30 AM EST
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One of the most consistent and unequivocally positive economic stories in the country over the past half dozen years has been our massive energy production boom. Driven by the shale revolution and powered by new fracking and other drilling technologies, the U.S. has experienced a huge increase in oil and gas production throughout the nation.

This continuing development is having myriad impacts to various parts of the economy. After declining for decades, textile jobs are starting to come back in southern parts of the country. Seeking low-cost and consistently delivered electricity, Chinese and Indian firms are setting up new textile plants in the Carolinas, creating hundreds of jobs.

BASF, the largest chemical company in the world, is spending some $4 billion over the next few years to build new plants on the Gulf Coast to take advantage of low natural gas prices. To put these cost savings in perspective, if BASF's plants in Germany had the same access to natural gas as we, it would save over $650 million annually.

Less than four years ago, the U.S. was importing almost 900,000 barrels a day of fuel. Now we export some 1.5 million barrels a day of fuel to world markets. Huge North American refiner Valero (VLO) is exporting around 20% of its output overseas, a number that should only increase with time.

In addition to the positive economic impacts this shale revolution is having in the U.S., it is and will remain one of my biggest themes within my own portfolio. It has accounted for some of the most outsized gains among the holdings I own this year as well. I expect this trend to continue to play out in 2014.

I have had huge gains in some small exploration and production names over the past 12 months. Among them are Bakken producers Triangle Petroleum (TPLM), Emerald Oil (EOX) and Abraxas Petroleum (AXAS). I think they will continue to see impressive production growth in the New Year, and they still sport reasonable valuations given their growth prospects. I also think M&A activity could pick up in 2014 as economic growth drives higher business confidence.

I also still like some of the refiners on a long-term basis despite their recent run. I hold Valero and Delek US Holdings (DK) among other plays in this space. Large oil services firms such as Halliburton (HAL) should continue to benefit from expanding use of fracking technology both here and abroad as well.

Income investors can play this theme via energy limited and master limited partnerships. I have several of these entities as they yield over 8% and have reasonable valuations. Among these are upstream plays Memorial Production Partners (MEMP) and QR Energy (QRE) as well as downstream refiner Calumet Specialty Products Partners (CLMT).

Investors looking for some backdoor plays on this theme should consider frac sand provider U.S. Silica Holdings (SLCA), railroad tank car manufacturer American Railcar Industries (ARII) and energy logistics firms such as Quality Distribution (QLTY).

As we head into the New Year, we should take a moment to pause and acknowledge the positive impacts that the shale revolution is having in this country. Investors should also continue to position their portfolios to benefit from the energy boom driven by this theme as the country is in the early innings of the march to our energy independence.

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