Market Overview

Energy Independence on the Horizon? Two Companies to Consider


In 1973, Richard Nixon announced his Project Independence 1980, which would "insure that by the end of the decade, Americans will not have to rely on any source of energy beyond our own." Over thirty years after the deadline, the dream of a self-sufficient energy policy remains a dream, but recent increases in domestic oil and natural gas output may mean that Richard Nixon's promise could soon come true.

Natural gas output has skyrocketed for the past four years, thanks largely to hydrofracking, the controversial technology that unlocks natural gas trapped in shale rock trapped deep below the earth's surface. A boom in oil drilling in North Dakota has also helped, with analysts projecting the state's oil output to double by 2015.

Although several companies are poised to benefit from the growing domestic energy production, Exxon (NYSE: XOM) and Chevron (NYSE: CVX) may be the strongest. Both are well diversified between natural gas and crude oil production, which has shielded them from low natural gas prices in the domestic market.

Cheap natural gas has had far-reaching consequences. It has impacted demand for altenrative fuels and lowered analyst expectations for natural gas suppliers like Chesapeak Energy (NYSE: CPK). Warm weather hasn't helped producers either, although natural gas futures rose on Tuesday as cooler weather promises to raise demand. That would certainly help Exxon, the country's largest gas producer, as well as Chevron, which produced 1.29 billion cubic feet per day of natural gas in the last quarter of 2011.

Even if it doesn't, both companies can lean on their oil output, which is the biggest cash cow for both firms. More aggressive domestic oil production could increase profitability for both firms, since it could offset the uncertainty of unstable regions. It would also shield the companies from the headaches of geopolitical struggles. The continued threat of EU sanctions against Iran is driving oil prices higher. Greater domestic oil production in the United States could render Iran more irrelevant, and ease pressure on oil futures by promising a steady stream of energy from a less politically volatile part of the world. Meanwhile, the oil hungry global economy and America's reliance on the car as a means of transportation would guarantee that energy producers will not exceed oil demand--at least until the electric car and alternative fuels replace the status quo.

Until that happens, higher oil prices due to troubles in the Middle East will still help Chevron and Exxon. In 2011, 89% of Chevron's profits came from upstream operations, so it is poised to profit from higher oil prices, thanks to its output of 447 million barrels per day of liquids in America and 1.38 billion barrels per day of liquids abroad. Exxon, which earned $34.4 billion thanks to upstream activity, is also in a strong position to benefit.

If analysts are correct that America became an oil exporter last year for the first time since 1949, Chevron and Exxon are in an optimum position to benefit. It is unlike that foreign oil companies, particularly British Petrol (NYSE: BP), will be as welcome to the oil fields of North Dakota. More certain environments for operations would also provide investors with greater certainty. Greater domestic operations would also give the oil giants priceless publicity, which both firms desperately need. Both firms would be wise to market themselves as main contributors to American energy independence, but only if they back it up with real domestic investment.

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