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Frackin Good

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Insights into the hydraulic fracturing (fracking) industry courtesy of Mike Weiner, Chief Investment Officer, Unified Trust Company.

Published in: Business, Economy & Finance
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Frackin Good

  1. 1. Frackin' Good Bullish on America…Markets have been following Paula Abdul’s lead so far this year, “Two Steps Forward, One Step Back” (can you hear it in your head? Sorry). For example, the US stock market makes a new high, a respected investor suggests it might be too high and the market sells off. Then a respected investor says she sees some bargains and the market engages and makes another new high. Rinse and repeat. Economic reports have been tepid and interest rates have actually retreated in 2014, not gently rise as many of us had suspected. The US and global economies can’t seem to grow more than 2% despite multiple interventions. Central banks have not been able to relax monetary policies so we have wax on, wax off on a daily basis. Markets are not poised for a collapse nor do they seem set to advance meaningfully. We will address some of the reasons for the malaise in future emails but we thought we might take a different perspective this week. Let’s review an exciting prospect for the genuinely longer term horizon. High-volume horizontal hydraulic fracturing, or fracking is the use of sand, water and chemicals injected at high pressures to open shale rock and release oil and natural gas trapped inside. If (a non-trivial if, by the way) fracking can be done cleanly and safely, with minimum environmental impact and maximum political backing, we could be on the threshold of a really big thing.
  2. 2. The above map shows the known shale deposits in our nation. Each deposit has unique characteristics. The Bakken formation in the North Dakota / Montana region is rich in recoverable oil while it is estimated that the Utica shale alone might have 100 years supply of natural gas. 100 YEARS! This enormous supply potential has helped depress natural gas prices. Natural gas is somewhat challenging to transport over great distances in its gaseous form so today this supply is predominantly available to North America. An initial and appropriate reaction to the fracking phenomenon is to consider that the US could be energy independent in the not too distant future. While you ponder that prospect, consider what an inexpensive energy source can mean to our factories. Plentiful, low cost US natural gas is a key competitive advantage for US manufacturers. Costs of manufacturing include labor, both skilled and unskilled, electricity, natural gas and other costs. Five years ago we might have been afraid that China would be the world’s manufacturer forever and that some US plants would be permanently sidelined. Today, China’s success has eroded much of its labor advantage and all of a sudden the US is among the low cost manufacturers in the world!
  3. 3. The graph above highlights the numerous advantages owned by US companies. We are at the beginning of a manufacturing renaissance in America that could be sustainable. We have a temporary mismatch between job openings and skilled applicants but that will resolve in the foreseeable future. We are bullish on America and American companies and by extension the US stock market for several reasons with the fracking phenomenon being one. We will review some others over time including 3D manufacturing and biotechnology. Let us know what you think. Mike Weiner, Chief Investment Officer, Unified Trust Company This report was prepared by Unified Trust Company, N.A. and reflects the current opinion of the authors. The sources and data upon which the report are based are believed to be accurate and reliable, but Unified Trust does not warrant the accuracy or completeness of information contained herein, takes no responsibility for any errors and omissions contained herein, and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. The information, opinion, and forward looking statements in this report are subject to change and may be withdrawn without notice. Information may be available to Unified Trust or its affiliates that is not reflected in this report. This report is general in nature and is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. Speak with your Unified Trust representative concerning your personal situation. This report is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any investment product. Before investing, it is important that you understand that investment products (including securities and mutual funds) and insurance products involve risk and may lose value. They are not FDIC insured or insured by any Federal government agency and are not deposits of, guaranteed or insured by Unified Trust. Diversification of your investments and allocation among different asset classes does not guarantee a profit or eliminate the risk of loss of value of the assets, and past performance and economic data
  4. 4. presented is historical, and is not a predictive or a guarantee of future results. Unified Trust does not provide tax, accounting or legal advice, and information presented about tax considerations is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Clients should always review any planned financial transaction(s) or arrangement(s) that may have tax, accounting or legal implications with their personal, non-Unified Trust tax and legal professional advisors.

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