U.S. energy companies, bolstered by booming shale production and advances in fracking technology, will provide bond investors with one of their biggest opportunities for the next decade, says Mark Kiesel, chief investment officer of global credit at Pacific Investment Management Co.
“We feel U.S. energy will outperform the market secularly as energy prices gradually recover and as the U.S. produces more of the world’s supply of natural gas and oil,” Kiesel wrote in a report published Wednesday by Pimco. “Many of these energy companies are growing at double the rate of the U.S. economy -- and we think they can sustain that growth.”
Opportunities may be found in liquefied natural gas, exploration and production companies and in pipelines and master limited partnerships in growing shale regions, according to Newport Beach, California-based Pimco. Surging shale output reduced the need for imports into the U.S. last year, increasing competition and leading to a global glut in oil that drove prices down almost 50 percent.
Over the next decade, the “U.S. will produce more of the world’s oil and gas over this timeframe due to geological advantages, horizontal drilling technology and advances in fracking completion techniques,” Kiesel said.
The Energy Information Administration is more cautious in its outlook. The EIA said last week that U.S. production will peak at a 43-year high this year before trailing off between July and early 2016 as producers work through a backlog of uncompleted wells.
Kiesel also sees opportunities in the U.S. housing market, which he wrote is set to grow as inventories remain at 20-year lows and demand, especially among first-time homebuyers, improves.
“We expect housing demand to pick up as credit improves gradually,” he wrote. “Households are finally in a position to relever, and we are now seeing mortgage debt growth -- something we haven’t seen in seven years.”
Metal and mining companies, which lack pricing power and growth, should be avoided, Kiesel said. Investors should also avoid companies that don’t put “bondholders first” in their capital structures, such as technology companies sitting on cash and borrowers that issue debt to buy back stock, according to Kiesel.