US Oil Output Booming, and the Publicly trading Gems that will Benefit

US Oil Output Booming, and the Publicly trading Gems that will Benefit

Given all the talk from politicians for years now about reducing U.S. dependence on foreign oil (which in practice usually translated to “Middle Eastern oil”), it was a bit surreal to hear an announcement from the Energy Information Administration (EIA) on January 9 that U.S. oil production exceeded 7 million barrels per day (bpd)—the first time it’s reached that level since March 1993—and was up 20% year-over-year. Now the EIA says U.S. production may increase by 14% this year, and the International Energy Agency predicted in November 2012 that by 2020 the U.S. would replace Saudi Arabia as the world’s largest oil producer.

Much of the growing production of both oil and natural gas is coming from the U.S. interior, and the number-one source of imported oil is Canada. So what companies stand to benefit from these trends?

The first and obvious place to look is the Oil & Gas Operations industry. A small and easily-overlooked gem is Adams Resources & Energy (NYSE: AE), a well-diversified company engaged in oil and gas exploration, transportation of liquid chemicals, and marketing natural gas, crude oil, and petroleum products. Adams has such peers as Valero Energy Corp. (NYSE: VLO) and ConocoPhillips (NYSE: COP), yet its current price performance is 2.48% versus 1.70% and 0.48% for its two larger brethren respectively. The stock has been beaten down, off 52.16% from its 52-week high, but it is seeing a comeback, now up 29.05% from its 52-week low and boasting rating upgrades from Thomson Reuters on November 9 and Second Opinion on January 7. Adams also has the highest sales per share in its industry at $805.88, and pays a $0.62 annual dividend as well. Its January 11 close was 35.94 for a market cap of $151.6 million.

A second consequence of this petroleum boom is that pipelines are needed to move the output from the continental interior to the coasts—especially the Gulf Coast—where most refining capacity is located and from where any exports would be shipped. The ongoing debate over the Keystone pipeline is a result of this need. U.S. natural gas production is booming even more than oil, and there has been discussion of building a liquefied natural gas (LNG) terminal near the mouth of the Sabine River, which forms the border between Louisiana and Texas. (Natural gas must be converted to LNG for efficient shipping.) The European countries are paying premium prices for natural gas and moreover are forced to pay those high prices to Russia, which is the main source of European natural gas. With the proper infrastructure, the U.S. could meet that overseas demand with substantially lower pricing.

TransMontaigne Partners, LP (NYSE: TLP) is a small-cap ($581.7 million) focused on the transportation, terminating, and storage of a wide range of petroleum products. Its current business strategy is focused on acquiring pipelines and terminals and expanding the capacity of its existing infrastructure. It has an 8 of 10 rating from Thomson Reuters and was upgraded to “Long” by Second Opinion on January 7. Now only 0.64% off its 52-week high at 40.24 on January 11, this is more of a buy-and-hold stock. It pays a quarterly dividend, currently $0.64. Like Adams it is outperforming its larger peers in price performance at 5.98% versus 3.54% for ExxonMobil (NYSE: XOM) and 3.32% for Chevron Corp. (NYSE: CVX).

Another company focused on the Gulf Coast is Martin Midstream Partners, LP (NASDAQ: MMLP). Its primary business lines are terminaling and storage; natural gas services; marine transportation of petroleum products; and gathering, processing, marketing, and distributing sulfur-based products (a byproduct of petroleum production). It is oddly out of favor with analysts right now, though Second Opinion did upgrade the stock to Neutral from Avoid on January 7. Its price performance is 6.73% versus 4.90% for industry peer Genesis Energy, LP (GEL) and –1.60% for Marathon Petroleum Corp. (NYSE: MPC). Martin Midstream is hovering right in the middle, 12.56% off its 52-week high and 12.52% off its 52-week low, at 33.15 on January 11, with a dividend of $.077 paid quarterly.

The company completed a secondary public offering of 3 million shares on November 20 at an offering price of 31.16, generating a bit over $90 million in net income. It also acquired Talen’s Marine & Fuel, LLC on December 31, adding ten marine terminals, 300,000 barrels of storage, and 4,000 feet of dock space in addition to tug boats, marine fueling barges, and rolling stock.

These three small-caps are good plays in the oil sector with PEs below their industry averages and solid futures, making them good buys at this time.