Why 2011 Should Be a Strong Year for Energy and Infrastructure

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Why 2011 Should Be a Strong Year for Energy and Infrastructure

by David Fessler, Energy and Infrastructure Expert

Friday, December 17, 2010: Issue #1410

Blazing Chinese economic growth? Check.

Record profits for many U.S. energy companies? Check.

Those two trends are set to continue in 2011, fueling the investment prospects for the energy and infrastructure sectors. In fact, many energy firms are already taking their excess cash and buying back their shares.

Translation? Higher equity prices in 2011.

Heck, even the U.S. government has broken with tradition and is actually lending a hand here, too, with its decision to extend the Bush tax cuts, in order to sustain the tenuous economic recovery.

What stocks rallied the day after the announcement? Energy and commodities.

And the fact that the recovery is still sluggish means we won't see any major policy changes from Washington in terms of energy and infrastructure, either. Rather, interest rates will remain low and the dollar will remain relatively cheap abroad.

That's great news for U.S. exporters, including those in the energy sector. Cheap dollars always favor exporters. As a result, I expect U.S. coal exports to enjoy a marked increase in 2011.

Add it all up and it means energy and infrastructure could be the market's two hottest investment sectors in 2011. Let's take a closer look...

Oil Forecast 2011

In 2011, global demand for all forms of energy - and what we'll have to pay for it - comes down to one word: oil. The price recently hit a two-year high - and for good reason.

Emerging countries - and especially China - are locking up supplies. Most of it belongs to nations unfriendly to the United States, but who are more than willing to sell it to China.

Last year, I predicted that oil prices would trade in a range of $70 to $100 a barrel. That's precisely what happened. As I write, the price is around $87, but for 2011, I'm looking at a trading range of $90 to $110 a barrel.

Of course, it could trade higher if a major geopolitical event affects the market. But essentially, continued demand from the likes of China and India will keep a firm price floor under the black goo - and we won't see much of an increase in global supplies.

One thing is certain: U.S. oil supplies won't increase anytime soon...

All Quiet in the Eastern GulfThanks to BP's (NYSE: BP) big spill, new drilling in the Western Gulf of Mexico has come to a screeching halt.

But that's not the worst part: Interior Secretary Ken Salazar did a 180-degree turn and rescinded his decision to allow oil and gas exploration in the Eastern Gulf of Mexico... for the next seven years.

And that's a big problem because this vast, unexplored area is thought to contain 3.7 billion barrels of oil and 21.5 trillion of cubic feet of natural gas. Exploration off the Atlantic coast of the United States is off-limits, as well. It potentially holds 3.8 billion barrels of oil and 37 trillion cubic feet of natural gas.

Couple that with increasing global demand, and it doesn't take a geologist to see that oil prices are headed nowhere but up.

So who should make money in the oil business in 2011?

Look at This Oil Stock in 2011

Companies that move oil around the world should do very well. One major player in this area is pipeline operator Kinder Morgan Energy Partners, LP (NYSE: KMP), which has an interest in over 180 terminals and over 28,000 miles of pipelines.

The company pays a healthy annual dividend of $4.44 per share (a 6.3% yield). The stock has risen by 14% in 2010 and I expect to see a similar performance from Kinder in 2011.

Natural Gas Forecast: Finally Rising... But Don't Expect Much

Having languished around the $3.50 per million British thermal units (mm/Btu) range for most of the summer, natural gas prices are headed slightly higher in 2011, too. There are several reasons why...

  • Inventory: U.S. natural gas supplies peaked at the end of October at a little over 3.7 trillion cubic feet (tcf) - about 3% lower than last year's record peak of 3.837 tcf. Even so, don't expect a rise much above $5 per mm/Btu. America's natural gas supply glut will suppress prices.
  • The Gas Switch: Many utilities are switching from coal-fired power plants to natural gas-burning plants. In fact, the Department of Energy says natural gas-fired power production is up 31% from five years ago. But remember, natural gas is America's most abundant fossil fuel, so the price floor remains for now.
  • Volatility: According to Bloomberg data, implied volatility in the price swings of short-term natural gas futures and options recently dropped to 34% - its lowest level in five years.

It all points to a relatively tight trading range for natural gas.

Pipeline companies like Kinder Morgan will benefit from shipping it around, but few companies will experience heady share growth in 2011, simply because of the glut in supply.

The 2011 "Energy Wildcard" Forecast: Ignorance and Electricity

In the alternative energy space, I expect solar and wind power to continue to make inroads as green energy sources. But only in countries that are actively subsidizing their adoption. For example, I expect France to get its alternative energy feed-in-tariff up and running in 2011 - a plan similar to the one currently active in Germany.

As for the United States, the solar and wind sectors are slowly making progress in some states. But there are problems... some of them ludicrous.

In my hometown, for example, a group is trying to block the installation of a solar panel setup at an elementary school, even though it will reduce their school taxes.

Incredibly, some residents are concerned that the solar panels could electrocute them or screw up their TV signals. These ignorant beliefs are what you get when you don't have a national energy plan. Two hundred dollars per barrel oil is coming... it's just a question of when.

Aside from the outlook for alternative energy resources, 2011 will be the year when electric vehicles start to appear in greater numbers. However, we won't see the bigger volumes until the end of the year. Much of the initial volume from manufacturers will be to fleets (like company cars, for examples), where fuel is one of their biggest costs.

Good investing,

David Fessler

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