Special Report: Two Stocks to Play The Coming U.S. Oil Export Surge

The ban has be lifted: here's how to play it...

On the tail end of 2015, with oil prices at historic lows, here's how the U.S. oil export ban argument played out...

“If energy is going to be used as a weapon, we need to have the largest arsenal.”

Former Texas governor Rick Perry said this at a conference in Houston.

He was referencing the clout of OPEC within the global oil trade and the fact that the U.S. was still beholden to the whims of the group.

Rick Perry, a likely presidential candidate at the time, offered a seemingly simple solution: Lift the oil export ban.

He characterized the isolationism of U.S. oil as an “error” and went on to suggest that if he were president, the ban would be lifted.

Although Perry didn't end up as president, the man who did has proven that he's still in favor of U.S. oil exports. Since the ban was lifted in early 2016, President Trump has done nothing to put it back in place, and has in fact made boosting the U.S. oil and gas industry a major point in his administration.

Still... oil has a long way to go before full recovery takes place.

So are oil exports the answer to the problems of investors?

The situation is complicated, but if done properly, the lifting of the ban could pay huge dividends, not just for investors but for the entire North American energy industry.

Of course, the reverse is true if exports are mismanaged — a strong possibility as global tensions continue to rise...

With oil prices still so low, U.S. drillers need any cost advantage they can get to stay in business, and now that oil exports are legalized, the price relief could give North America an even stronger grip on the global industry.

Low Oil, Middle East Turmoil

Before the crude oil bear market, the argument for exports was that U.S. drillers were producing light, sweet oil, but most of our refinery capacity is designed for heavy, sour crudes.

Because of this, it made sense to export some of the lighter oil to displace it with heavier crude, thus balancing refineries — that and it's always good for the economy to have more exports than imports.

However, with oil hitting lows it hadn't seen in more than a decade in 2016, the argument changed...

Right now, Brent crude (the international standard) is trading at $51, and WTI (the U.S. standard) is trading at $48.

That $3 spread means U.S. producers can find a price advantage per barrel for their exports overseas. Even though this advantage is limited, after oil prices dropped more than 50% in a matter of months, every dollar counts.

Beyond the cost advantage, U.S. oil exports greatly benefit our allies, who are at risk of shortages and supply squeezes because of turmoil in the Middle East.

The oil price rout hit all of OPEC hard. Venezuela is in a recession just waiting for the slightest catalyst to spark rebellion. Argentina and Nigeria aren't far behind with their own massive financial losses. Saudi Arabia itself has had to cut its social programs to make up for lost oil revenue, inciting domestic displeasure.

Iran and Qatar are both facing ire from fellow OPEC members for alleged terrorist connections, and may be facing new rounds of U.S. sanctions as well.

The escalation of violence in the region wrests the oil market out of the hands of the big OPEC producers even more than the outpouring of new U.S. supply has.

But far from scaring new entrants away, the state of the oil market today has made it clear just how essential--and lucrative--oil supplies really are.

And the freeing of U.S. oil into a more competitive global market benefits U.S. drillers and allies as they search for a stable provider.

U.S. Oil Export IPO

The problem here is that with export ban lifted, the opportunity for mismanagement by the powers that be is huge.

The government may already have done some damage by legalizing exports without a clear export cap. Without a cap, U.S. oil could flood the market and drive prices even lower, while too strict of a cap would make the cost of exports greater than the benefit.

But U.S. drillers operating today have made it through the worst of the rout, and know better than to send the market spiraling into another devastating glut.

Because of these risks, however, I like to think of investing in growing oil exports like I think of investing in a sexy new IPO: Investors should proceed with caution.

Recently, all of the big-name IPOs to hit the market have ballooned well above their value only to crash down a few months later.

Instead of pouring your hopes and hard-earned dollars into an exporter or a driller with enough production to ship oil abroad, I have a safer suggestion.

Exports will lift all boats. The best way to invest is to stick with a strong company that boasts a long history of profitability and stable income.

One sect of the oil industry fits these criteria and will be instrumental in oil exports.

Two Midstream Stocks for Exports

Good intuitive sense tells us that the only difference between allowing exports and not allowing exports is that oil will travel from well-head to boat to a refinery.

Whereas previously, oil would go from the well-head to a storage tank to a refinery in the U.S.

I realize this is obvious, but here's what I'm getting at: If the only difference when it comes to exports is in midstream changes, why would I invest in anything else?

With that in mind, smart investors interested in making money off of U.S. oil exports should gear their portfolios toward midstream companies.

Here are two I'm particularly fond of...

Shell Midstream Partners LP (NYSE: SHLX)

SHLX Shell Midstream Stock ChartThe company is an IPO spin off from Royal Dutch Shell, and it owns and operates that company's midstream assets. Because of its structure, the company pays out a hefty dividend to shareholders (about 90% of profit) each quarter.

While the company may not directly transport oil overseas, it will have a growing role in the movement of oil from new shale fields and into the refinery and export structures of the United States Gulf Coast.

By virtue, the production growth that has resulted from exports provides higher demand and more growth for Shell midstream.

Of course, if you're looking for something a little more direct, I understand.

In this case, I suggest...

Nordic American Offshore (NYSE: NAO)

NAO Nordic American Stock ChartNordic American Offshore operates a fleet of oil tankers that are compatible with U.S. regulations on oil (and petroleum product) delivery from North America.

The company has been important middleman since exports were permitted and should profit handsomely from the shipment of U.S. oil throughout the world.

Beyond that, the company pays a 20.3% dividend and trades below $10. Its shares slid unfairly with oil prices last year, and the company now trades for much less than it should.

Smart investors will buy now and watch the share price rise as oil exports from the United States (and all over the world) ramp up this year.

Good investing,

Keith Kohl

Energy and Capital

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