“Revealed preference” is an economic principle that has a great deal of utility in investing. Based on what a consumer is buying, investors can follow the actions of various sectors of the marketplace to profit from the “revealed preference” in the spending.
A current example of this is found in the recent Wall Street Journal article about Repsol (PINK: REPYY), the Spanish oil giant, seeking to acquire up to $10 billion in oil and natural gas assets in North America so as to have more secure holdings. Individual investors should note here that a huge oil company, with all of its resources, is placing a premium on political stability, resulting in the attractiveness of North American assets.
The recent headline of Royal Dutch Shell Oil (NYSE: RDS-A) having to shut down its Trans-Niger pipeline due to thefts is the latest example strife in production areas, along with the continuum of tension in the Middle East, most recently in Syria.
For investors ranging from Repsol to Shell Oil to the individual, there are many oil and natural gas firms to choose from that operate safely and securely in North America. And from our article last week on the Syria premium on oil prices, the energy sector could be a great place to invest.
The Revealed Preference of Oil Companies
In terms of “revealed preference” there are the two favorite oil companies of legendary investor Warren Buffett: ConocoPhillips (NYSE: COP) and Suncor Energy (NYSE: SU). Both are up for 2013, and both pay above-average dividends: for ConocoPhillips it is 3.91 percent; for Suncor Energy, the yield is 2.10 percent. Over the last quarter, Suncor Energy is up more than 24 percent. For ConocoPhillips, the share price has jumped more than 25 percent for the same period.
There are plenty of small-cap oil and natural gas firms to choose from in North America, too.
Octagon 88 (OCTBB: OCTX) has been surging in recent market action due to a very favorable report about its holdings in Canada. It was also just granted the official production well license for the drilling of the first production well on its holdings in Canada. Another small-cap issuing very positive news was Americas Petrogas (TSX: BOE), which is based in Calgary, the heart of Canadian oil country and the home of Suncor Energy, too. For the second quarter of 2013, Americas Petrogas had net revenue higher by 70 percent and a strong increase in sales volume, too.
Oil Pipeline Companies are also Attractive
In addition to oil and gas companies, pipeline firms are also attractive assets to own in the North American energy sector. Many of these pay very high dividend yields, too. Like oil and natural gas firms, pipeline entities range in size, too, allowing for a diversified investment portfolio.
The large-cap pipeline firms include Kinder Morgan (NYSE: KMO) and the Williams Companies (NYSE: WMB). While the average dividend for a member of the Standard & Poor’s 500 Index is around 2 percent, for Kinder Morgan it is 4.4 percent. For Williams Companies, the dividend is 3.86 percent.
Small-cap pipelines often have robust dividend yields, too.
Holly Energy Partners, L.P. (NYSE: HEP), based in Texas, has a dividend yield close to 6 percent. Its profit margin is close to 40 percent. The average profit margin for a member of the Standard & Poor’s 500 Index is 8 to 10 percent.
For Inergy Midstream LLC (NYSE: NRGM), the numbers are just as compelling.
The dividend yield for Inergy Midstream LLC is 7.18 percent. The gross margin for the Missouri-based pipeline operator is almost 80 percent. Its sales growth over the last five years has averaged more than 27 percent.
Unlike Shell in Nigeria, shareholders of these pipeline firms do not have to worry about theft shutting down operations.
North America is Where Energy is At
After reviewing the wide range of investment opportunities in the North American energy sector, it becomes obvious why it is the “revealed preference” of Repsol for billions in spending. Energy is the largest industry segment of the global economy. Oil and natural gas will continue to dominate the sector.
Much of the resources and production for those fossil fuels is in politically unstable areas, which is always negative for investing. For long-term gains, North American energy companies, of all sizes, offer promising futures to income, growth, and value investors.
What are your thoughts about North American energy stocks?