Rudolf LeemannEquity Analyst Chief Investment Office
UBS Wealth Management
Since 2005, new shale gas extraction techniques have led US natural gas production to grow almost twice as fast as its consumption, creating what many now believe to be a US energy revolution. By now, many will have heard of ‘fracking’ or hydraulic fracturing, and horizontal drilling. With these techniques, natural gas, the cleanest fossil fuel, has become abundant in the US, while domestic oil production has also turned around from a previously declining trend.
These innovations have given the US a competitive advantage unlikely to be easily replicated around the world. For one, landowners in the US are also the titleholders of sub-soil resources; nearly everywhere else, governments have the exclusive ownership of such resources. This difference could dictate the speed of the technologies’ adoption. In the US, the interests of the producers (oil and gas revenues) are aligned with the landowners’ (royalty income) and the government’s (tax revenues). Elsewhere, the landowners have little direct benefit from drilling operations while enduring all of its downsides, and thus are likely to oppose development.
The natural choice
The rapid development of natural gas resources has led to an abundance of natural gas supplies, pushing US prices to low levels. Today, natural gas in North America costs less than a fourth of the cost of oil on an energy-equivalent basis. We believe this will prompt fuel switching to natural gas. Energy-intensive industries that have outsourced some production offshore are being drawn back to the US. A recent survey by the Boston Consulting Group shows that more than half of US-based manufacturers with sales exceeding USD 1bn are actively considering ‘re-shoring’ production.
The investment potential of the US energy revolution cuts across many sectors. Industries related to oil and gas have thrived in recent years, with a rapid investment rise in transportation, storage, pipelines, and infrastructure. If the US government approves several liquefaction plant projects this year, as we expect, infrastructure and support services could become a new growth area in 2014. We see opportunities in exploration-and-production, refinery, and pipeline-operator stocks.
At the same time, cheap natural gas is already driving the auto industry to switch to more fuel-efficient vehicles such as hybrids and electric cars. It is also giving a competitive edge to transportation companies, electric power grids, utilities, and energy-intensive industrials such as petrochemicals and steel. We prefer investing in an actively managed, well-diversified investment vehicle that gives broad-based exposure to the different beneficiaries from the trends described in this theme.