Oh, the things we do to save money on gas! Have you ever driven around the neighborhood looking for the cheapest station? Do you have one of those discount cards that gets you $0.05 off on the third Tuesday of the month?
Any way you shake it, no one likes to pay at the pump. Yet there’s one tried and true method to get money back from your gas purchases: Own the companies that bring you gasoline. Why let all of those dollars you spend on gasoline simply burn up in your engine when you could be getting some of that money back from the companies that found it, made it, transported it, or sold it to you?
Let’s look at three simple investment strategies that will take that money going into your tank and put it back into your pocket.
1. Sell the shovels so others can dig for oil
From the beginning, oil exploration has been a speculator’s game. While some drillers made it big, several others lost their shirts. Today, drilling has become much more advanced, and the chance of finding oil is much better, but there’s still no guarantee that oil will be found at every well.
What every well does have, though, is drilling equipment. And what better time to be in the oil-services industry than 2013? The exploration and production industry plans to spend a record $644 billion in capital expenditures to drill for new resources. And with some market projections showing that oil could go as high as $250 a barrel by the end of the decade, this trend will probably continue for quite some time.
Of all the companies in this space, one stands out among the rest as the one-stop-shop for everything drilling equipment and services: National-Oilwell Varco, Inc. (NYSE:NOV) . From simple replaceable parts such as drill bits to complex deepwater drilling ships, National Oilwell Varco is the world’s largest supplier of rig equipment, with a market share of about 60%.
Those who got in early with NOV have been richly rewarded. The company’s share price is up more than 1,000% since its initial public offering in 1996, and 500% over the past 10 years. In addition, it issued its first quarterly dividend in 2010 and has raised it by 30% since. Granted, NOV’s 0.8% dividend yield looks pretty small when compared with industry giant Schlumberger Limited. (NYSE:SLB)‘s 1.8% yield, but the new technologies for shale drilling give NOV plenty of room to grow both its income and its dividend.
2. If oil needs a ride, help take it there
A large part of the success of the recent U.S. energy renaissance has hinged on our energy infrastructure. When all of this new oil and gas started coming out of the ground, we didn’t have enough pipeline to support it. Slowly but surely, midstream energy companies have picked up the slack and laid thousands of miles of pipeline to keep oil and gas flowing smoothly across the United States. With so much added production yet to happen, the Oil & Gas Journal expects $38 billion to be spent on new pipelines in 2013 to keep pace with demand.
What makes investing in oil and gas pipeline companies lucrative is that they’re relatively stable outfits with predictable revenues. Most of these companies have supply contracts for several years, and so the cash flows from those contracts can be assumed with a large amount of certainty. Building out new pipelines can be very capital intensive, but the capital to maintain those pipelines is considerably smaller. So many of these companies have leftover cash flows that they return to shareholders through large distributions.