Expanding supply and shrinking demand are driving North America closer to energy independence and creating opportunities for investors, a Green Bay, Wisc. money manager says.
Many believe the U.S. and Canada are on course to be energy independent in five to 10 years.
"It wasn't long ago natural gas was at $12 or $13 per billion cubic feet and we were concerned we'd run out," said Adam Longlais, vice president and investment analyst in Associated Banc-Corp's private client and institutional services area. "But soon, we'll have more energy than we can use."
Fracking and other new drilling techniques have busted open access to domestic supplies, particularly the oil and natural gas buried in shale rock formations in places like Texas and North Dakota. Meanwhile, an aging population that is not driving as much and more fuel-efficient vehicles and equipment are reducing energy use, Longlais said.
On the supply side:
EOG Resources Inc. (EOG, $170.96), Houston, explores for and produces crude oil and natural gas.
EOG has the best shale acreage, and it would take 15 years for the company to drill all of those oil reserves alone, Longlais said. Over the past year, EOG has been acquiring more land to lease in areas where there hasn't been much drilling, often with shell companies, he added.
EOG turned cash flow positive in the second quarter, Longlais said.
"It's a really big deal that they're now cash flow positive, and I don't think the market is pricing it in," he said. Over the next few years, Longlais expects EOG's oil portfolio to grow by almost 20 percent and cash flow to increase by 11 percent annually.
Halliburton Co. (HAL, $55.32), Houston, provides services and products for the exploration, development and production of oil and natural gas.
Halliburton is among a handful of companies big enough to invest in the technologies needed to extract oil and natural gas from shale rock after the wells are drilled, Longlais said. He expects the company's premium technologies to help it outgrow the oilfield service market and produce 25 percent annual earnings growth for the next three years.
"Halliburton has great margins and almost all of their equipment is being used," he said. The biggest risk to the company is the possibility of a significant drop in oil prices, Longlais said.
Halliburton shares have traded in a 52-week range of $29.83 to $55.37. They could reach $65 in the next 12 months, Longlais said.
On the demand side:
Cummins Inc. (CMI, $130.70), Columbus, Ind., makes diesel and natural gas engines, and components.
Cummins recently developed a natural gas engine that has accelerated demand among trucking companies for this type of engine, Longlais said. "Every time a trucker changes from diesel to natural gas, it should be a benefit to Cummins," he said.
WABCO Holdings Inc. (WBC, $86.36), Brussels, Belgium, is a global supplier of trucks and buses.
WABCO uses technology to make trucks and buses safer and more fuel efficient. A truck that used the company's full suite of technology offerings would use 10 percent less fuel than a comparable truck, Longlais said.
The company's automated manual transmissions can reduce fuel consumption by 3 percent to 5 percent, yet only about 10 percent of U.S. trucks use them, he said. About 70 percent of trucks in Europe use such transmissions. Another top-selling aerodynamic product that reduces drag and resistance on trailers, lowers fuel consumption by 5 percent, he said.
Technologies like these are expected to help WABCO outgrow its end markets by 8 percent to 10 percent a year for at least five years, Longlais said. The biggest risk WABCO faces is a potential downturn in Europe, which represents more than 60 percent of the company's sales.
WABCO shares have traded in a 52-week range of $56.86 to $89.19. They could reach $100 in the next 12 months, Longlais said.
