The American economy is undergoing a transformation that arguably could be a turning point of historical proportions. While the so-called new economy is often credited with propagating change, the old economy — especially the oil and gas sector — is going through an evolutionary phase that our team believes is among the most important economic developments of recent years.
Largely on the momentum of so-called fracking technology (properly known as hydraulic fracturing), nontraditional exploration techniques have turned global oil and gas markets upside down. One can call the effects a rebalancing perhaps, or maybe even a restructuring. Either way, it represents a momentous shift. In our team’s view, the United States can realistically be described as an emerging market when it comes to energy exploration and production.
Let's consider a handful of telling data points:
- According to estimates published by the U.S. Energy Information Administration, U.S. crude-oil production had its largest ever one-year gain in 2011.
- The U.S. Department of Energy estimates that U.S. oil production will likely pass Saudi Arabia by 2020.
- Between 2009 and 2012, the amount of oil shipped by rail in the U.S. grew by 2,000% (Data: Association of American Railroads, via Bloomberg).
Source: Energy Information Administration, eia.gov
Chart above is for illustrative purposes only.
Additional, less-obvious benefits to nontraditional energy development include the profound effects that new drilling can have on local communities. Consider, for instance, the economic lift experienced in shale-rich North Dakota: The state leads the U.S. in job growth, wage increases and low unemployment.
At the company level, the resources that are brought to market by nontraditional energy development can be beneficial. Petrochemical companies, for instance, which use gas to make plastics used in our everyday lives, stand a good chance of seeing lower input costs. A second example is playing out in the steel indusry, where new mills are being built to support nontraditional drilling projects. An abundance of low-cost gas is presenting opportunities that were unavailable not too long ago.
As nontraditional energy sources come online, proactive companies will have opportunities to improve efficiencies, boost financial performance and invest in new projects. We will seek to uncover companies that can take such steps, with a special emphasis on firms that we believe have diversified business models, stable earnings, deep management teams and a history of increasing dividend distributions.
In recent quarters, the oil and gas segment has been among the highest allocations within the equity income fund we manage, Delaware Dividend Income Fund. As this segment continues to feel the effects of nontraditional energy development, we will be following the outcomes. As we do so, we will consider new holdings for the fund when we identify investment candidates that (1) meet the criteria mentioned above, and (2) complement the existing portfolio in a way that is consistent with the fund’s objective.
Scott P. Hastings, CFA, CPA, is a vice president, senior equity analyst for Delaware Investments’ real estate securities and income solutions (RESIS) group, performing fundamental bottom-up stock research across several subsectors of the domestic REIT universe, and focusing on opportunities in Canada, Europe, the United Kingdom, and Australia for the firm’s global REIT effort. For more information, please visit www.delawareinvestments.com