New Energy For Your Portfolio

Selzer_Brian-Web2

OCEAN CITY — In 2012, the U.S. saw the largest expansion in domestic oil and gas production in the more than 150 years since it began drilling commercial wells. Improved technology that can unleash oil and gas from shale rock formations helped domestic oil output grow last year by a record 853,000 barrels a day, to the highest level in 17 years, according to the U.S. Energy Information Administration. And for natural gas, whereas the amount extracted from shale represented just 2% of the U.S. natural gas supply in 2000, it was 37% in 2012.

This U.S. energy boom comes largely thanks to the technology of "fracking," or hydraulic fracturing, coupled with horizontal drilling methods that allow for much faster, more efficient extraction of oil and natural gas. Fracking is controversial, with opponents noting that its methods — pumping a mixture of water, sand and chemicals under high pressure into source rock to crack it open, allowing gas and oil to flow — may result in groundwater pollution and other problems. But energy companies have continued to invest aggressively in this technology. And as processes have improved, natural gas production has become far more predictable.

"We’ve gone from a high-risk, high-return market, with huge price volatility and swings in success of drilling rates, to a more stable current market that’s largely about manufacturing," says Francisco Blanch, managing director and head of Global Commodity Research at BofA Merrill Lynch Global Research.

Although the prospect of what Blanch calls a "shale revolution" might suggest investment opportunities in producers of natural gas, he also notes that the bottomed-out prices in the U.S. may actually be adversely affecting these businesses, which include large energy companies that maintain significant natural gas operations as well as firms that focus exclusively on the fuel. Many stocks in this sector have, however, historically provided solid dividend income, and low valuations now could translate into long-term opportunities.

In the meantime, Blanch suggests several indirect approaches that might help tap the current U.S. energy boom.

Invest in energy-intensive U.S. businesses. Domestic manufacturers, particularly makers of steel, aluminum and automobiles, may benefit significantly from falling energy prices, which could reduce operating expenses, increase profitability and free up capital to invest in expansion and new employees. Domestic companies also are poised to save on transportation costs as many of them (particularly automakers) move factories back to this country. Rising labor costs in many parts of the world have made emerging markets less competitive.

Another area to look at may be the U.S. petrochemical industry, which has largely switched from oil to natural gas for feedstock used to make chemicals such as ammonia, a vital ingredient of fertilizer. Those cheaper chemicals serve as economical raw materials for everything from auto manufacturing to farming and household goods, and can now be exported at globally competitive prices.

Consider providers of consumer goods and services. According to the U.S. Energy Department, natural gas home-heating prices have fallen 21% in New England and 25% in the mid-Atlantic during the past five years. Those savings leave consumers with more discretionary income, and as they spend less on utilities, they’re able to spend more at restaurants and on electronics, travel, and a host of other products and services.

Look at transportation companies and retailers that manage large fleets of delivery trucks. Such businesses are exploring options for converting from diesel fuel to liquefied and compressed natural gas. Meanwhile, railroad companies are experimenting with gas-powered locomotives.

Think beyond stocks. Master limited partnerships, or MLPs, can help investors diversify within the energy sector, and they bring potential tax advantages (and risks) as well. Energy MLPs are typically offered by pipeline operators whose profits are based more on the volume of natural gas transported than on the price of the gas itself.

Today’s investing landscape could shift if the U.S. eases restrictions on selling surplus natural gas overseas. A Department of Energy study released last December suggested that increased exports could provide a broad boost to the economy. But it would likely raise U.S. prices for the fuel, and that worries groups such as America’s Energy Advantage, a coalition of energy-dependent companies.

If such concerns keep natural gas production and prices at current levels, "that would be a negative for U.S. gas-producing companies but a plus for gas-consuming companies and consumers," Blanch says. "North America has become natural gas-independent, and that’s a big net positive for the economy on all sides." That makes this an ideal time to consider which investments might benefit most from these factors during the next five years.

(A Merrill Lynch senior financial advisor, who can be reached at 410-213-8520.)

Seeking Steady Growth In Technology Stocks

OCEAN CITY — For the past decade or so, many investors seeking the potential for steadier growth have avoided the tech sector, thanks in part to its association with the dot-com bubble of the late 1990s and early 2000s. But today the landscape for technology companies is markedly different. In fact, investors seeking potential stability may well want to look … Continue reading

Health Care Reform’s Impact On Your Retirement

OCEAN CITY — While there is still some debate about various aspects of the Patient Protection and Affordable Care Act (ACA), it is highly unlikely to be repealed anytime soon. As its provisions continue to be implemented, this is a good time to take another look at how some of the ACA’s key elements might affect those approaching or thinking … Continue reading

Three Emerging Markets To Consider For The Future

OCEAN CITY — Although emerging markets have been helping to drive the global economy for some time, analysts at BofA Merrill Lynch Global Research generally expect these developing economies to grow at a slower rate over the long term. There are, however, some notable exceptions — chief among them South Korea, Mexico and Turkey. According to Alberto Ades, co-head, these … Continue reading

Eldercare: Will You Be Ready?

OCEAN CITY — There are few things more wrenching than realizing that an aging parent or loved one can no longer manage alone. In the flurry of decisions that follow — about living arrangements, responsibility for care and where the money will come from — family members may disagree about what’s best. Unfortunately, numerous adult sons and daughters are now … Continue reading

Roth Conversions Get A New Boost

OCEAN CITY — In January, Congress passed the American Taxpayer Relief Act of 2012. Along with many much-discussed measures that allowed the government to avert the so-called fiscal cliff, the law contains a less publicized provision revising the rules surrounding Roth 401(k) plans. On the surface, the new rules provide employees with somewhat greater flexibility. But as with all tax … Continue reading

The Changing Face Of Retirement In Today’s World

OCEAN CITY — Today, working in retirement isn’t a purely financial decision. Americans are living longer, and in a world where the average 65-year-old can expect to live well into his or her 80s, what were once known as the post-work years have become the springboard for new, fulfilling journeys — each different from the other. “Our whole concept of … Continue reading

Tips On Financing A New Business

OCEAN CITY — In 2011, Americans created an average of 543,000 new businesses each month for an annual total of roughly 6.5 million, according to the Kauffman Index of Entrepreneurial Activity, a leading indicator of new business creation in the U.S. Despite a slow recovery, that was among the highest annual number of entrepreneurial ventures founded within the past 16 … Continue reading