Creating an Energy Portfolio ... for Dummies

Before starting, let's get something straight: I'm no expert in energy. But really, how many people out there can honestly say they're "experts" in the field? Probably not many, but everyone needs some exposure to the industry.

That being the case, I think it would be worthwhile to show how I, an investor of average energy knowledge, went about filling out this vital part of my retirement portfolio.

Oil: it's not going anywhere anytime soon
Though "peak oil" enthusiasts will certainly have the last laugh if we run out of oil sooner rather than later, I don't see the use of the black gold disappearing anytime soon. Though we're certainly looking for ways to wean ourselves from it, too much of the world relies on oil and its byproducts for demand to taper over the coming years.

While going after obvious names like ExxonMobil (NYS: XOM) or BP (NYS: BP) might make a lot of sense (we see their stores every day), I take an alternate approach. I thought back to the California gold rush. Thousands moved West to make their fortune, but precious few found it in gold. Some clever businesses, however, sold things that gold prospectors needed -- picks, axes, shovels, and blue jeans-- and made out like bandits.

National Oilwell Varco (NYS: NOV) , fills the same niche today that Levi Strauss did more than 100 years ago. The company provides all the parts that oil and natural gas companies need to do their business. Dubbed "No Other Vendor" because of its ubiquity, the company's parts have a 60% share in the rig equipment market, and 90% of all rigs out there are equipped with at least some of its products.

I find that NOV gives me the kind of exposure to oil that I'm looking for, without the company-specific risks that might be associated with owning an oil extractor. Currently, through purchases and share appreciation, NOV is 10.2% of my portfolio.

Natural gas: the wave of the future
Like I said, I don't think oil is going anywhere anytime soon, but that doesn't mean we aren't looking for alternatives. Natural gas is front and center for alternative energy plays. Fellow Fool Aimee Duffy recently completed a brilliant crash course on natural gas that's a must-read for any newbie to the field.

Again, it would be easy to go after companies actively extracting natural gas from the earth. If that's what you're after, big names like Chesapeake Energy (NYS: CHK) or SandRidge Energy (NYS: SD) -- both of which have exposure to oil extraction as well -- are worth exploring.

For me, however, I have a two-pronged attack. First, NOV has some exposure to natural gas: More than half of the company's North American activity comes from shale and other unconventional drilling methods.

Furthermore, I went looking for another company that would benefit from natural gas, regardless of who extracts it. My search left me with Westport Innovations (NAS: WPRT) . The company develops engines that can run on natural gas only. No, your next sedan probably won't have a natural gas engine, but Westport is making strides. The company already has one major partnership formed with trucker Cummins, and another with Royal Dutch Shell. Since it's still early in the game for Westport, it only accounts for 1.7% of my portfolio, though I plan on adding to that position soon.

Other alternatives: biofuels.
Finally, I would be remiss to leave out a tiny company whose technology has totally wowed me: Solazyme (NAS: SZYM) . Using patented microalgae, the company can turn things like sugar cane, grass, and forest rubbish into tailored oils.

Sounds too good to be true, right? Well, consider what the company's latest earnings release revealed:

  • Feedstock agreements (the sugarcane, corn, grass, etc. used in the process) are guaranteed to fulfill 90% of the company's target capacity through 2015.
  • Testing with the U.S. armed forces is continuing to go well, as they have entered into stage two of their agreement.
  • The first commercial flight using a Solazyme blend was just successfully conducted.
  • Unilever just signed an agreement for tailored oils.

As you might guess, this company and technology is so small that I have yet to bite. I will, however, be adding my very first position when trading rules allow, bringing Solazyme up to 1% of my portfolio.

Want to find out more about natural gas?
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