Drill, baby, drill: U.S. Oil & Gas ETF

어제

Political changes often bring uncertainty to the market, but letting politics dictate your investment strategy is rarely wise. Across the past century, American markets have weathered a wide range of political shifts, from conservative to progressive agendas, yet the long-term trajectory has remained upward. Regardless of who's in office, the fundamentals of investing stay the same: identify and invest in quality businesses with strong growth potential.

Many stocks in my portfolio, for example, have the resilience to perform well no matter the administration—be it Trump, Kamala, or anyone else. Rather than reacting to political outcomes, focus on strengthening your own financial position. Prioritize building your income-generating skills, saving, and investing wisely over time. This approach enables you to grow your wealth regardless of the political landscape.

Ultimately, you have the most control over your own financial decisions. The U.S. free market system continues to foster innovation and productivity, which drive long-term growth. As long as that system remains, businesses and individuals will find ways to thrive, making steady and thoughtful investing the smartest strategy for your future.

Little note before you read the report:

This report provides a general overview of the potential impact of the 2024 U.S. election on the Oil & Gas sector. Given the uncertainty around which specific companies will benefit most, a prudent strategy may be to invest in an ETF that provides broad exposure to the industry. The iShares U.S. Oil & Gas Exploration & Production ETF, for example, could be a strong option. While the ETF may adjust its holdings in response to changing market conditions, predicting specific winners within the sector remains challenging. But in general terms, I think the victory of Trump will benefit the sector.

Overview
The outlook for the oil and gas sector is complex amid shifting policy trends. The recent focus on expanding oil and gas production, championed by Trumps political slogan drill, baby, drill, signals a potential for increased energy supply. Initiatives such as opening new drilling sites in Alaska are likely to drive higher energy production, potentially reducing costs for consumers. However, this development may present mixed results for energy companies that have thrived on high oil prices over the past few years.

High oil prices in recent years, peaking in 2022, have significantly bolstered profitability for companies like ExxonMobil. With oil prices currently around $70 per barrel—still within profitable margins—these companies continue to benefit. However, increased production aimed at reducing prices could compress these profit margins, even though rising production volumes might offset some of this impact by boosting overall revenue.

Investment Insights and Sector Strategy

While the outlook for traditional oil producers remains cautiously optimistic, there could be short-term buying opportunities if oil prices experience significant dips in the coming years. In this context, we expect profitability and revenues to stabilize or even rise due to the continued relevance and importance of the industry.

The following investment ideas offer alternative ways to capitalize on the oil and gas sector's anticipated growth without relying directly on commodity price gains.

1. Natural Gas and Pipeline Companies
Pipeline companies, especially those focused on natural gas, present a compelling option. These companies generate revenue from transporting oil and gas, making them less sensitive to fluctuations in commodity prices. Moreover, deregulation could stimulate additional infrastructure projects, creating further growth potential. Key players to consider include:

• Enterprise Product Partners (EPD): A robust choice in the pipeline sector, with the stability of consistent dividends and a well-diversified revenue stream.

• Energy Transfer (ET): Offering a high dividend yield of 7.81%, though with less consistency in dividend growth.

• Kinder Morgan (KMI): Another notable pipeline company with a strong track record in the industry.

Each of these companies offers potential growth alongside dividend income, making them attractive for income-focused investors seeking exposure to energy infrastructure.

2. Texas Pacific Land Corporation (TPL)

For a unique angle on oil and gas, Texas Pacific Land Corporation (TPL) is worth monitoring. TPL holds extensive land assets in Texas (approximately 880,000 acres) and benefits from royalty interests on oil and gas production. This model allows TPL to earn revenue without bearing production costs, yielding exceptionally high profit margins. TPL is part of the The iShares U.S. Oil & Gas Exploration & Production ETF, representing at the moment 4.22%.

Key highlights of TPL’s financial performance include:

• Gross Profit Margin: 93%
• Operating Margin: 79%
• Net Profit Margin: 66%
• 2023 Oil and Gas Royalties: $350 million, representing 56.5% of revenue
• Free Cash Flow Growth: 10-year CAGR of 30%
• Revenue Growth: 10-year CAGR of 31.98%

TPL also maintains a strong financial position, with $1.2 billion in shareholder equity, $900 million in cash, and minimal debt, allowing substantial capital returns to shareholders. Though not a consistent dividend payer, TPL has a track record of special dividends and stock buybacks. For long-term investors, this stock offers compelling growth potential in a high-margin, low-risk model within the oil and gas sector.

Conclusion
While traditional oil stocks remain solid investments, diversifying into pipeline companies and royalty-based businesses like TPL may offer better risk-adjusted returns under current and anticipated market conditions. Investors should consider these alternatives to balance exposure to oil and gas while potentially mitigating the risk of fluctuating energy prices.