With oil and natural gas prices steadily rising, many analysts and investors are wondering if this is just a bear market rally or if this could signal a spike in the price that will top the highs set last summer. According to the New York Times, demand for oil from both India and China is expected to double over the next 20 years, as the number of cars increases and more people move to cities where they will consume more natural resources. In addition, natural gas demand is expected to increase by over 20% by 2030. For investors, this presents an opportunity to take advantage of the lower prices in order to see sizable profits down the road.
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When looking at the above demand figures, an investor might automatically assume that they should just buy the major oil companies to be profitable. While this is certainly true, there are other ways that you can make money in these two areas.
Mixed Quarterly Results
Sabine Royalty Trust (NYSE: SBR) reported better-than-expected year-over-year income of $1.39 for the fourth quarter 2008, in comparison to 99 cents for the same time last year. Similarly, San Juan Basin Royalty Trust (NYSE: SJT) reported an increase in year-over-year income of 66 cents for the fourth quarter 2008, in comparison to 57 cents for the same time one year before. Then there is Enerplus Resources Fund (NYSE: ERF) which reported income of 31 cents for the first quarter, in comparison to 82 cents in 2008.
With oil prices being down sharply from this time last year, both Sabine Royalty Trust and San Juan Basin Royalty Trust reported better than expected year-over-year income. This is a sign that these companies have stability in earnings growth, and can benefit from an increase in the price of crude. Enerplus Resources Fund, however, shows that it is more susceptible to large moves in the price of oil. That being said, the increasing long-term demand should help provide the company with increased long-term earnings. (Read our related article, Peak Oil: What To Do When The Wells Run Dry.)
TEPPCO Partners Limited (NYSE: TPP) reported improving year-over-year net income for the first quarter of 62 cents in comparison to 57 cents for this time last year. El Paso Pipeline Partners (NYSE: EPB) reported better-than-expected year-over-year earnings for the first quarter, 40 cents in comparison to 32 cents for the same time last year. Despite lower natural gas prices and demand being hurt by the recession, the stronger year-over-year numbers are a clear sign of financial strength, signaling that TEPPCO Partners and El Paso Pipeline Partners are well-positioned to benefit from the increase in demand for natural gas over the coming years. (For more, see our answer to What Economic Indicators Are Especially Important To Oil Traders?)
Clearly, future demand for both crude oil and natural gas will continue to rise over the next several years. Many companies will benefit from this demand, as it will lead to improved income and earnings, which will translate into higher valuations for the above mentioned trusts and partnerships. While no one can tell what the future will bring, the sharp sell-off from last summer in both areas presents prudent investors with the opportunity to make significant long-term profits. (For more, see A Guide To Investing In Oil Markets and our Oil And Gas Industry Primer.)