Friday May 04, 2012
by Benjamin Shepherd, contributing editor ETF Investment Insider
While US energy policy is a popular topic of debate among politicians, I wouldn't bet against the domestic energy industry. The US is now producing more oil now than it has in over a decade. Here are a couple of ways to play this trend.
Although production levels are on the rise, crude prices keep climbing even higher. Further development of domestic resources is our best insurance policy against externally driven shocks over which we have little control.
The administration has announced that a new automated permitting process is being implemented to reduce waiting times. This will reduce the average time required to secure a permit for onshore drilling from close to a year to just 60 days.
While that doesn't actually open more federal land to drilling activity, it will help create some additional supply by allowing producers to drill state and private land more quickly.
The most obvious is a bet on oil and gas exploration and production outfits. iShares S&P Oil & Gas Exploration and Production ETF (XOP) holds only US-based E&P companies.
The 73 companies in the fund's portfolio, including names such as Comstock Resources and Exxon Mobil, are those that have most participated in the trends I've outlined.
The one drawback is that these are high-volatility names. Despite being domiciled in the US, these firms have heavy exposure to foreign markets and aren't immune to international problems.
ALPS Alerian MLP ETF (AMLP) offers a lower-volatility play on domestic energy trends. The fund holds a basket of midstream master limited partnerships (MLP) that are the backbone of America's energy transportation and storage network.
They own the pipelines that move oil and natural gas, as well as the storage facilities at distribution endpoints.
Midstream MLPs are basically the toll takers of the energy industry; they get paid based on the volume of commodity product moved, rather than the price of the commodity produced.
That makes for smoother revenue, while providing exposure to the energy production and demand story. The ETF also offers a substantial 6 percent dividend yield.
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