If you’ve been wondering how to invest in energy, fracking could be the way to go. The United States is developing more and more domestic energy sources through this process. As a result, we rely less on foreign suppliers. According to the International Energy Agency*** our country will reduce oil imports from 10 million barrels a day to 4 million by 2020. And by 2035, we’ll produce more oil than Saudi Arabia “inshallah!_ (Arabic for “May it come to be”) How is all this possible? Fracking.
What is Fracking?
Some time ago, brainiac engineers discovered a new way to get at that gooey gold we call oil. They simply drill down into shall gas and oil deposits using high-pressure water with a mixture of sand and chemicals. The tactic began in the 40’s but picked up steam(get it?) in the 90’s when it was discovered that horizontal drilling would yield better results.
Over the years, the geeks in the white smocks and thick glasses enhanced the accuracy of seismic imaging too. That simply means that oil companies have a much better idea of where to drill to find those gushers. As a result of all these advances, more oil fields have become economically feasible. In fact, so much new energy has been discovered that our reserves are now 5 times greater than those of Saudi Arabia according to the IBD*.
Why is Fracking an interesting investment?
Fracking is bringing more and more energy to the market every month. As a result the United States needs to import less energy each year. That’s going to create more jobs and huge tax revenues as well. According to the Investor’s Business Daily, the industry has already created 1.7 million new jobs and will create 3 million more jobs by 2025. State and federal tax proceeds will climb from $65 billion to over a trillion dollars by the same time. That’s significant.
Fracking also makes natural gas more plentiful and less expensive. In turn, that helps us use less coal which generates less pollution and more cost savings.
How can you invest in energy fracking?
In my mind, the most efficient way to hitch your wagon to the fracking gravy train is by way of ETFs. Many of these ETF’s provide a very attractive yield exceeding 6% to boot. ( The way these ETF’s pay such high dividends is by investing in MLPs (Master Limited Partnerships). MLPs get special tax breaks but in return they must pay out 90% of their earnings to shareholders. That’s why the dividend payout is so high.)
I cannot provide specific investment advice on the blog. But if you Google “FRACKING ETF” you’ll uncover a number of alternatives. Once you come up with your list, make sure to compare the different ETFs before you make an investment decision.
What are the risks?
There are 3 general classes of risk that you face when you buy fracking stocks or ETFs:
1. Market & Economy
Anytime you invest in stocks, you run the risk that the market or economy could turn against you. That’s right. Even if you pick the best fracking stocks or ETFs, if the timing is bad and the market turns sour, you are going to get burned. There is no way to avoid this risk other than invest for the long-term and be ready to go through a number of market cycles.
People concerned with the environment have voiced concern over fracking.* They fear that the process pollutes the water supply in the surrounding areas. There is a great deal of controversy about this at the moment and I have no idea if their concerns are justified or not.
There is no way of knowing how the protests against fracking will impact this industry. Also, if the federal government continues to subsidize alternative sources of energy such as green alternatives, this could slow the growth of fracking. Even though those alternatives are far less efficient than fracking, it’s tough to compete with government subsidies.
Bottom line? If public opinion turns against this technology, the companies involved in this industry are going to evaporate. If that happens and you invest in these companies, your money is going to disappear along with them.
The Tax Reform Act of 1986 created the MLP structure. But there is no telling what the government might do in the future. A new tax law might be passed that eliminates the benefits of the Master Limited Partnership. If that happens, it would have a negative impact on fracking MLPs. There is not telling if this is going to happen and of course there is no way of knowing how much of an impact such a change would have on this investment.
As of today, it looks like there is a very bright future ahead for the fracking industry. But this is not to say that every company involved in this industry will do well or even survive. That’s why I recommend that if you invest in his narrow sector of the economy you do so using a fund or ETF that invests in a number of companies and has the resources to do ongoing research.
Fracking could be one of the greatest investment opportunities there is right now. But this is not to say that there aren’t very real risks. Are you investing in energy fracking? How? Are you prepared for the risks?