A Safer Way to Cash in on the Shale Revolution
by Jay Peroni, CFP®
Did you know the United States is projected to be the world’s top oil producer within the next seven years? That’s right! The International Energy Agency has projected that the United States is on pace to beat Russia and Saudi Arabia in daily crude output.
How will this happen? One word: shale! Shale gas refers to natural gas that is trapped within shale formations. Shales are fine-grained sedimentary rocks that can be rich resources of petroleum and natural gas. Sedimentary rocks are rocks formed by the accumulation of sediments at the Earth’s surface and within bodies of water. Common sedimentary rocks include sandstone, limestone, and shale.
Over the past decade, the combination of horizontal drilling and hydraulic fracturing has allowed access to large volumes of shale gas that were previously uneconomical to produce. The production of natural gas from shale formations has rejuvenated the natural gas industry in the United States. (Courtesy of EIA)
Woods Mackenzie, a consulting firm has projected that U.S. shale formations are expected to yield 4.2 million barrels of oil per day by 2020. Today that number is around 1.6 million barrels so you can see the amazing growth opportunity (more than double the current rate).
Trying to cash in on the “shale revolution” can be a high stakes battle. Many of the publicly traded companies dedicated to exploration are risky at best. Even some of the larger more established companies like Chesapeake Energy (NSYE: CHK), Devon Energy (NYSE: DVN), and Kinder Morgan Energy Partners (KMP) have seen their share prices take a beaten over the past 12 months.
One Year Price Chart: Sunoco Logistics (NYSE: SXL)
As I look at opportunities in shale, one company that stands out is Sunoco Logistics (NYSE: SXL), which is a part of our PACE portfolio (precious metals, agriculture, commodities, and energy). Sunoco’s logistics business for the past few years has actively pursued growth opportunities in burgeoning shale oil and gas. This pipeline, terminal and storage business is focused on growth opportunities that include pipelines related to the growing development in the Marcellus
and Utica shale plays.
Crude oil and natural gas liquids production in shale plays provide Sunoco with opportunities to extend its pipeline network and collect attractive fee-based cash flows. Sunoco Logistics’ core pipeline business is attractive and generates healthy cash flow each year. Acquisitions of additional pipeline properties will add to this flow, and the marketing business helps Sunoco juice returns by locking in margin opportunities.
This is an attractive company: Great yield as it pays a 3.5% dividend, big distribution jumps, and the history of consistently increasing distribution. Sunoco’s core assets are liquids pipelines that receive inflation-protected annual rate adjustments. It has the ability to boost cash flows over the next several years as well.
It is currently trading around $52 and my price target is $62 per share, a 20% gain over the next 6-12 months. If you are looking for a safer way to get onboard with the shale revolution Sunoco Logistics (NYSE: SXL) is one worth a closer look.
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Disclaimer: Investing involves risk. Always do your own due diligence and consult a trusted financial professional before making any investing or financial decisions. Jay Peroni is a Certified Financial Planner and is part of our Christian Financial Advisor Network