OffShoreOilRig_PublicDomain_30011When in doubt — about the markets (50% of the time, about Congress (100% of the time) — it’s time to get back to basics.

This won’t change: More people around the world are going to buy and use more stuff and eat more and better food. And with this in mind, you can ignore Congress and make some serious money.

Start with energy.

Demand for energy continues to increase. China has passed the U.S. as the world’s largest importer of oil, according to new data this week. In a decade or so when the U.S. achieves the functional equivalent of energy independence, China will be by far the largest importer of oil; it can send its boys and girls to the Middle East to protect its oil life lines.

In the coming decade there is a great deal of money to be made on the explosion in U.S. energy production. Even Congress agrees it should not mess around too much with what Mother Nature has put in the ground.

Which part of energy sector?

There are two great investment sectors within energy. No, not renewables, they are dying, being killed off by cheap natural gas. If you want to invest in solar, I suggest you buy the Brooklyn Bridge; I heard it is for sale.

No, you want to invest in fracking and in harsh environment and deep-water drilling.

Fracking is the relatively new process of extracting oil and gas from previously “too hard to drill” shale formations found more in North America than anywhere on earth. Drilling in this manner has made North Dakota the second-leading oil producing state in the U.S. and has made people in northern Pennsylvania willing to forget 50 years of industrial decline. In response, Wall Street has been flooding investors with MLPs and other investment vehicles similar to that bridge I mentioned previously.

If you are going to invest in fracking, you should look to a traditional driller growing rapidly due to the exploitation of new fields through fracking. The company I like at present is Gulfport Energy (GPOR). (I own shares and have sold calls against them). GPOR has major operations near the Gulf and has just begun gushing fracked oil and gas in the Utica shale in eastern Ohio. Revenues in the first quarter of this year were $55 million; in the second quarter, $70 million. Short-sellers and the chronically skeptical look at the failures of other companies in the area and other shale formations — notably Chesapeake Energy (CHK) — are ignoring GPOR’s success and assuming it will go away. I believe it will continue for the foreseeable future – -and this dissonance has created opportunities in the stock.

Energy stocks, deep and harsh

GPOR had run for several months but has stalled recently due to market conditions and the need for the shares to take a pause. The run-up may have re-started this week as the politicians in D.C. slowed down the number of spitballs they were throwing at each other. The stock sells at a premium to the sector — but at a fraction of many of the far more speculative investments in fracking currently being peddled by Wall Street.

That sounds harsh. Is that an adequate segue to discuss harsh environment drilling? Yes, it is.

There are two names you should consider:  Seadrill (SDRL) (yield of 5.9%) and Transocean (RIG) (yield of 4.9%; I own shares and have sold calls against them). SDRL is relatively new to this space and has sold off a good deal of its shallow-water drilling assets. RIG is the market leader and trendsetter with a stock buffeted by the Deepwater Horizon catastrophe and a Carl Icahn run at the company, hoping management will increase the dividend.

Both companies have superb technology in demand around the world. SDRL boasts more than 90% capacity utilization of its rigs and deepwater rates are holding firm. What is far more important in the coming months are plans by several nations — Mexico, Brazil, Russia — to open the next generation of their oil fields to development, all in harsh and deep-water environments. Capital flows and revenue to companies serving this sector will far outstrip activity in more traditional oil exploration and extraction. If you are thinking short-term, SDRL has run, RIG has stalled, you can choose which stock appeals more to you at this time. I expect both companies to boost their dividends based on growing profitability in 2014.

Michael Shulman owns shares in Transocean and has sold calls against them.


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