6 Different Ways to Play the Energy Sector in 2013
Dec 18th 2012 11:21AM
Updated Dec 18th 2012 11:32AM
In the spirit of Christmas and giving, I plan to use the next two weeks leading up to Christmas to count down the 12 Days of Christmas in all their Foolish glory. In my rendition of this Christmas tale, you won't be hearing about turtle doves or French hens, but you'll hear about great ways to save money in 2013 and CEOs who laid rotten eggs in 2012.
In the previous "Foolish Days of Christmas," we've looked at:
- 12 Companies Doubling Their Dividends in 2012 and 1 to Watch in 2013
- 11 Easy and Great Ways to Save Money in 2013
- 10 Drugs Approved by the FDA in 2012 to Be Thankful For
- 9 ETFs to Help Diversify Your Portfolio in 2013
- 8 Possible Reasons to Sell a Stock
- 7 Great Stocks That Are Perfect for Your IRA
As always, I ask you to sing along with me: "On the sixth day of Christmas my true love gave to me..."
Six different ways you can play the energy sector in 2013!
U.S. energy independence is a hot topic in Washington, and discovering how to produce energy from as many sources as possible is one way the U.S. can reach its goal of greater or complete independence. Here are six considerations for you to ponder as we head into 2013.
No matter how "evil" oil might seem, it will still remain the primary source of fuel for our cars for at least a few more decades. According to ExxonMobil, the U.S. will become a net exporter of oil and natural gas by 2025 due to major finds in the Gulf of Mexico, in Alaska, and throughout much of the central United States.
Without question, there are an immeasurable number of ways to play the oil sector, but I can think of no company I'd rather own than Chevron , which gives investors exposure not only to the upstream oil and gas exploration and production side of the business, but also the upstream refined product. Just this year, Chevron moved into dividend aristocrat territory with its 25th straight year of annual dividend increases, and it continues to expand its influence globally. I honestly can't think of a viable reason not to own Chevron.
Coal accounted for 42% of all U.S. energy generation in 2011, and even with a greater emphasis on alternative energies like solar, wind, and hydroelectric, it's almost certain to play an important role in the U.S. energy picture. During the presidential debates, even President Obama pledged to continue to emphasize the use of clean coal.
Within the U.S., the coal picture is abysmal, with Patriot Coal going bankrupt and many others seemingly down for the count. While I've emphasized a strong probability of a rebound in coal producers like Arch Coal , which has de-emphasized domestic sales in favor of international expansion, I feel that master-limited partnership Alliance Resource Partners is the smartest way to play coal in 2013. Alliance Resource has reported 11 straight years of record profits, boosted its dividend in 17 consecutive quarters, and contracted roughly 27 million tons of coal through 2018 (plus or minus 10%), with virtually none of it exposed to highly volatile market prices.
Natural gas is clean, readily available thanks to huge shale field finds throughout the U.S., and beginning to rebound in price. In 2010, natural gas accounted for about a quarter of all electricity generation, and given its still-inexpensive price and clean-burning qualities, you can expect its value to climb higher.
My original thought was to suggest that investors focus on individual drillers here, but the real investment opportunity in natural gas lies in the storage and transportation of this bountiful energy resource. Therefore, midstream master-limited partnerships like TC Pipelines and ONEOK Partners , which specialize in these activities and pay out handsome dividends, look like they could reap shareholders some big rewards in 2013.
Nuclear energy still accounts for approximately 20% of all electrical generation in the U.S., so it's unlikely to go away anytime soon. Although a few serious accidents -- including Three Mile Island in the U.S., Chernobyl in Russia, and the Fukushima-Daichi earthquake-related incident in Japan -- have tarnished nuclear's reputation, it's still a safe and clean form of energy generation.
However, the high costs of producing nuclear power are currently working against the industry. Exelon , the U.S. leader in nuclear production, has suffered through a miserable year as rising nuclear costs have made it difficult to compete with cheaper coal and natural gas. There is, however, a reasonable probability that the U.S. government may consider some kind of subsidy in the future to help out nuclear-energy producers. If a subsidy were to be pushed through Congress, then the nuclear sector and Exelon could be dirt-cheap investments at their current levels.
The solar sector is far from completing the washout of an inventory glut for both American and Chinese manufacturers. What we've witnessed in this washout is that many of the Chinese-based solar firms took on far too much debt and managed their inventory poorly, while well-funded companies like SunPower look poised to prosper.
Austerity measures in Europe may constrain orders over the first half of 2013, but SunPower's backing by energy giant Total means it has little to worry about from a financial perspective. It's also worth noting that SunPower is one of few solar companies that are 100% vertically integrated. This means SunPower can internalize all of its costs, lower its cost per watt to more attractive levels, and build on its U.S.-leading operating efficiency. Solar is clearly a big part of America's energy independence plan, and SunPower looks poised to play a big role.
I admit that I'm not a huge fan of alternative-energy investments, but I favor wind more than any of the available choices, as you can erect a productive wind farm just about anywhere, and it's a zero-emission energy source.
Two companies that are making big strides in wind production are Duke Energy , which has invested $2.5 billion over the past five years to produce 1,000 MW of wind-generated power, and NextEra Energy , which has the largest wind-power-generating capacity in the U.S. at 8,569 MW as of 2011. Ultimately, wind power will help drive down customer costs and should be a big boost to these utilities' bottom lines -- as well as a big plus for the environment.
As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. Combine this strength with an increased focus on renewable energy, and EXC's recent merger with Constellation puts Exelon and its best-in-class dividend on a short list of top utilities. To determine whether Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.
The article 6 Different Ways to Play the Energy Sector in 2013 originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services have recommended buying shares of Chevron, ONEOK Partners, Alliance Resource Partners, Exelon, and Total, as well as writing puts on Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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