Bondholders Can Join the Fracking Boom

07/24/2012 10:30 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

As we open up the US interior again to new and old forms of energy, one unrealized benefit is that some woebegone states are getting a huge influx of money from the new energy explorers that will help boost their municipal bonds, writes Marilyn Cohen of Bond Smart Investor.

The natural gas explosion and oil drilling expansions are pushing this country into energy independence. And when you consider the low cost and cleanli­ness of natural gas, you are talking about a US energy efficiency that will soon have the Arabs shaking in their dishdashas.

I am convinced most of the US population doesn’t have a clue that the natural gas “gold rush” is the real deal and that the economic ramifications are humongous. You’ve read about fracking; the Marcellus, Bakken, and Barnett shale regions; the environmentalists in a tizzy; and farmers getting rich overnight from oil and gas leases. Even 60 Minutes did an expose on energy earlier this year.

Examine the depth of this energy bonanza. There’s not only money to be made, but also a big fat safety net to count on. The magnitude of this topic can’t be covered in a single page. But the investment offshoots can.

You’ve got trucks, drilling equipment, pumps, jobs that beget income, personal taxes, sales tax, shelter (homes, apartments, and mobile homes) property tax, retail sales, restaurants, and food services. This encompasses the explosion of the natural gas industry on populations of the cities, counties, and states involved. The multiplier effect and economic windfall of this energy and job boom are fantastic for the companies, ancillary providers, and governments.

There have been many dynamic booms: The tech boom, the real estate boom, and the luxury goods boom, for example. Eventually, they all hit bottom with a thud.

But in the meanwhile, this one seems to have a long time line. Plenty of time for us to own bonds whose companies participate and reap the income benefits of this energy boom.

This can ultimately mean we bondholders will have better interest coverage and im­proved credit quality. In the public sector, this boom means cities and states are benefiting from a wind­fall of revenues that once could not have been imagined.

should own municipal bonds issued by the states that are reaping billions in revenue from the energy boom. Notice these aren’t the “smoke and mirror,” mismanaged welfare states of California and Illi­nois. These states are already more fiscally responsive. Their credit worthiness is either on top of the investment quality chain or working their way toward the top.

So, unlike California, which still projects make-believe revenues into infinity, these states understand fiscal responsibility. Their municipal General Obligation bonds belong in your portfolio.
 
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