These Three Major Trends Will Drive Energy Investing Profits in 2017

The biggest profits we're eyeing from energy investing in 2017 stem from three major trends we will show you today.

energy investing

As of early May, oil sits below $50. That's bad news for U.S. oil drillers who spend a lot of money getting oil out of the ground.

A century and a half of successful oil drilling has left the United States with no more cheap-to-get oil. While the horizontal fracking revolution has made it possible to drill oil that was previously inaccessible, it's expensive. As ConocoPhillips CEO Ryan Lance has put it, "Forty-dollar to fifty-dollar oil prices don't work in this business." ConocoPhillips is one of the world's largest shale producers.

The U.S. oil industry desperately wants to see oil prices rise. Money Morning Global Energy Strategist Dr. Kent Moors expects prices to rise to $56-$58 by later this year, but they will likely remain sluggish for the time being.

But Kent knows where to look for profits when prices are flat or falling. Kent scored up to 314% gains for his Energy Advantage subscribers from 2012-2015 with Valero Energy Corp. (NYSE: VLO) stock. Oil prices fell by 61% over the same period.

Now he has identified three major trends to capitalize on while oil prices tread water.

First, energy investors can take advantage of rising demand in China, where the government is making massive investments in energy infrastructure that will benefit energy companies for decades.

Second, the squeeze on U.S. shale companies means bankruptcies and consolidation ahead. Investors can keep their money in the United States and profit from the coming M&A boom.

And third, the landscape of the energy sector in the U.S. is shifting. Fossil fuels won't become obsolete any time soon, but clean energy production is on the rise.

Let's take a closer look at these moneymaking trends, plus cover five energy stock picks for profits in 2017 ...

Follow the Energy Investing Dollars to Asia

Expansion in any economy means expansion in energy demand. So it's no surprise that China is the biggest driver of energy demand in the world today. China already accounts for nearly one-quarter of global energy consumption. And the U.S. Energy Information Administration (EIA) predicts that China and India will be responsible for more than half of the world's energy demand growth between now and 2040.

China's government has taken an active role in the energy sector, especially with the One Belt, One Road initiative. The plan - also known as the New Silk Road initiative - calls for a $4 trillion to $8 trillion investment in transportation and energy infrastructure connecting China with the rest of Eurasia. Construction has already begun on several railways, and future projects include roads, pipelines, and utility grids along major trade routes.

That makes China an important market for energy investors. In fact, between China and India, Kent says the shift in energy demand (and crude oil demand specifically) toward Asia will be "the dominant trend for at least 20 years, if not more."

It's a trend investors can't afford to overlook, and in a moment, we'll identify a stock set to benefit from China's rising demand. But first let's look at the second major trend in energy...

The Coming M&A Boom

Sluggish oil prices hit U.S. shale drillers from two sides. First, obviously, lower oil prices cut into revenue. Second, the lower value of company assets raises costs when the company has to roll over its debt.

In fact, as Kent points out, yields for high-yield energy bonds have "exploded" in the last few months, with double-digit annualized rates. So expenses are rising for shale companies just as their revenue is dwindling.

This squeeze from both sides means many of these companies will have to sell their assets to stay afloat.

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It might seem logical for investors to cut and run under these circumstances. But smart investors can profit by identifying companies that are about to be acquired and ride the wave upward as the deals are made.

The key is selecting companies with assets that will be profitable when oil prices find a steady balance between supply and demand - i.e., companies that more cash-rich competitors will want to buy up.

We've seen this happen before. In December, shares of Russian oil company Rosneft jumped 21% in two weeks when it was acquired by Glencore Plc. (LON: GLEN). And back in 2015, MarkWest Energy Partners LP (NYSE: MWE) enjoyed a similar jump when it was acquired by Marathon Petroleum Corp (NYSE: MPC).

We'll highlight three shale oil companies that will likely benefit from the coming M&A boom at the end of this article. Now, let's move on to the third and final trend in energy...

Energy Independence and the Rise of Clean Energy

We're entering a new age in the energy sector. While the rise of renewable resources has some sounding the death knell for fossil fuels, the reality for the next decade at least will be a balance of oil, natural gas, coal, nuclear, and renewables.

The growing abundance and cost efficiency of these various energy sources means that the United States could reach energy independence within the next decade. A January report from the EIA predicts that the U.S. will be a net energy exporter by 2026.

energy stocks

That's in large part thanks to the recent oil boom. In 2005, the United States imported 65% of its oil. By 2015, that was down to 28% and, according to analysts at Raymond James & Associates, could be as low as 11% by 2020.

The increase in oil production doesn't mean renewables aren't expanding in importance. As of 2016, renewable energy provided about 17% of U.S. electrical generation. And a study by the U.S. Department of Energy's National Renewable Energy Laboratory (NREL) projects that number to rise to 80% by 2050.

In other words, clean energy and fossil fuels are on the rise in the United States. There is no single energy source that's going to dominate the next decade. That means plenty of opportunities for savvy investors. We're going to see the expansion of infrastructure on all fronts. So investors should be looking at companies that are positioned to thrive in a diversified energy environment.

Now let's look at our stock picks.

Top Stock Picks to Profit from the Three Major Trends

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While India may be Asia's major energy driver in 10 or 20 years, China is where the infrastructure spending is happening now. So China's largest refiner, China Petroleum & Chemical Corp. (NYSE: SNP), also known as Sinopec, is an ideal pick to profit from Asia's demand growth.

It helps that Sinopec is a favorite of the Chinese government, meaning it should benefit from all the infrastructure spending on the slate. And its size ($90 billion market cap, 1.2 billion outstanding shares) means it's unlikely to swing wildly on any one event.

Here's Kent's take on why you can forget about the Chinese economy "cooling off" any time soon.

While Sinopec is a great choice to take advantage of a long-term trend, Kent has identified three U.S. stocks that could benefit from the M&A boom on the way. Callon Petroleum Co. (NYSE: CPE) operates in the Permian Basin in Texas, the most cost-efficient oil-producing region in the country. Drillers there can break even at around $35 per gallon. That's probably why last year there were eight deals of more than $1 billion for assets in the region.

The other two are in this special free report for Kent's Oil & Energy Investor readers. They're among the top energy stocks to profit as oil moves into a consolidation phase. Get those picks here.

As we mentioned, the American energy revolution means a blend of renewable resources and traditional fuels. Diversity in energy production means we should look for diversity in our investments, finding the companies that will play a big role in energy's future.

One of the best-positioned companies as we move into this new age is U.S. petroleum refiner and ethanol producer Valero Energy Corp. (NYSE: VLO). Valero is the world's largest independent refinery, with a capacity of 3.1 million barrels a day at its refineries in the U.S., Canada, the UK, and the Caribbean. Shares have more than tripled in value since 2011 (when Kent recommended it to his Energy Advantage readers). It's been a great pick, and Kent says it is still "one of the best picks out there."

Another great pick is Woodward Inc. (Nasdaq: WWD), which through a host of products helps businesses and organizations increase energy efficiency. That's going to put it in high demand over the coming decade as we shift our energy focus. Woodward has been around since 1870, which means it has survived two world wars, the Great Depression, and better than a half-dozen banking crises. You don't make it that long without understanding how to adapt. As Kent details here, we expect it to make the transition and thrive in the new energy economy.

Finally, as renewable resources like solar and wind make up more and more of the energy landscape, investors should consider iShares Global Clean Energy ETF (Nasdaq: ICLN). The ETF mirrors the S&P Global Clean Energy Index, which includes 30 companies involved in clean energy production, equipment, and technology. This includes companies such as First Solar Inc. (Nasdaq: FSLR), Vestas Wind Systems A/S (CPH: VWS), and Idacorp Inc. (NYSE: IDA). An ETF is useful to get exposure to an industry on the rise without the vicissitudes of any individual stock.

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About the Author

Stephen Mack has been writing about economics and finance since 2011. He contributed material for the best-selling books Aftershock and The Aftershock Investor. He lives in Baltimore, Maryland.

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