Energy Costs Could Be 17% Higher This Winter. Here’s One Investment to Make Before That Happens.
Energy Costs Could Be 17% Higher This Winter. Here's One Investment to Make Before That Happens.
Winter is coming, in the form of higher utility bills — the average cost of heating a home is expected to be $1,200, which is a 17.2% climb from last year.
Part of the reason for the expected higher prices is the gas and oil bans that the European Union (EU) has placed on Russia in an effort to decrease its ability to fund its war against Ukraine.
Russia supplied a quarter of the EU's oil and 40% of its natural gas in 2021, and the EU announced in March 2022 that it will cut gas imports from Russia by two-thirds within a year.
In response, the United States has sent record liquefied natural gas exports to Europe to ease its reliance on Russian energy.
On top of that, the U.S. Energy Information Administration (EIA) expects U.S. natural gas consumption this year to increase by 4% from 2021, but it also listed that U.S. natural gas inventories at the end of August were 12% below the five-year average.
This means that supply and demand may be out of whack by the time winter rolls around, which will be a problem for the nearly half of U.S. households that heat their homes with natural gas.
Now, we're not just sharing this to give you a head start on saving up for your winter bills.
Our team will go beyond the news and show you possible investments to take advantage of the premium prices for energy.
While there are very few pure-play natural gas stocks, one investment area to think about is natural gas transportation. There's a bit of a moat for gas and oil transportation and storage companies, as it's a dangerous business that requires specialty knowledge and equipment.
And that specialty led us to a Green Zone stock that is paying out a dividend yield of 8.73%.
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Energy Transfer LP (ET) transports and stores natural gas, crude oil, liquid natural gas, and NGLs (natural gas liquids).
With 120,000 miles of energy infrastructure across 41 states, Energy Transfer moves 30% of the nation's crude oil and natural gas through its pipelines. It has diversified revenue sources within the energy sector, allowing it to set up fee-based contracts for consistent revenue.
Source: Energy Transfer Investor Presentation September 2022
The diversified revenue sources also can help offset any downturns for a particular energy source or issues with a particular business operation.
But in terms of natural gas, a lack of demand shouldn't be an issue. The global natural gas distribution market is expected to increase in value by nearly $300 billion between 2020 and 2025, which will be a boon for ET.
Something also worth mentioning is the conviction the management team has in its company, and members show that conviction by investing their own money.
Roughly 13% of the stock is owned by company insiders, while industry peers have roughly 2% insider ownership.
Source: Energy Transfer Investor Presentation September 2022
Executive Chairman Kelcy Warren bought $36 million worth of ET in August, and while there are a lot of reasons to sell a stock, there is only one reason to buy a stock — you think it is going to make you money.
Putting ET under the microscope, we can see that it is considered a high-risk investment, with a Volatility Quotient of 35.26%.
But it also has some significant positives:
It's considered a “buy,” as it's in our Green Zone.
It has been in an uptrend since Sept. 9, according to TradeSmith's Smart Moving Average, which is a good sign from our algorithms that the stock price is beginning a sustainable move higher.
And as a reminder, it has a dividend yield of 8.73%.
This is also a company that will benefit from the “commodity supercycle” that Senior Analyst Mike Burnick believes we are entering.
He anticipates that renewable energy will become more prominent in the years ahead but that widespread adoption will take longer than expected.
That's led to a record lack of capital investment in the oil and gas sector, with $341 billion invested in 2021 compared to $700 billion in 2014.
He believes this will create an energy supply shock of historic proportions, which can lead to price gains across the board for companies with oil and natural gas operations, especially considering that natural gas has been referred to as a “transition fuel” because it has fewer polluting effects than traditional fossil fuels.
You can find Part 1 of Mike's commodity supercycle prediction story here, and Part 2 is available here.
Take care,
Team TradeSmith
Bonus Natural Gas Investment Opportunity
The biggest gains will always be made through owning individual stocks, but for anyone who likes to limit their risk as much as possible, ETFs can fit into a risk-averse investor's portfolio.
An ETF is a basket of securities, which means its price isn't connected to the stock performance of just one company. Although there may be less money to make than there would be in owning an individual stock, there are still profits to be made, and ETFs tend to drop less in price than individual stocks in a market downturn.
The First Trust Natural Gas ETF (FCG) tracks companies deriving substantial revenues from midstream activities (processing, storing, transporting, and marketing) and exploration or production of natural gas.
Its top five holdings include:
DCP Midstream LP (DCP): Green Zone
Hess Midstream LP (HESM): Yellow Zone
Western Midstream Partners LP (WES): Green Zone
ConocoPhillips (COP): Green Zone
EOG Resources Inc. (EOG): Yellow Zone
FCG is currently in our Yellow Zone, but we still wanted to put it on your radar as an opportunity if you would rather invest in an ETF than an individual stock.
Examining FCG's holdings may also give you some investment ideas if you're looking for individual energy stocks.
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The chart below represents the best-performing open positions over the last two years, as recommended by our software.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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