The Outlook for Investing in Energy in 2012

Global demand is important, but so is the production side of the equation.

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For one, there is a greater emphasis by energy producers to invest in the technology needed to develop and transport liquefied natural gas (LNG). It's a theme expected to be relevant for some time as emerging-market demand is rising. Post-quake, Japan has made LNG a greater focus of its current and future plans for power generation.

New approach. What's more, new techniques for extracting natural gas and crude oil from the earth have helped ease concerns about the inability of U.S.-based energy producers to grow domestic supply and offset the country's heavy dependence on foreign sources for these commodities. These unconventional new drilling techniques have lowered the overall cost structure for companies engaged in the exploration of traditional energy sources such as crude oil and natural gas. More-productive drilling techniques have led to an overall increase in mid-continent U.S. oil production, which has led to lower pricing for refiners, Dowd explains.

Also on the horizon is deepwater exploration. The combination of more-sophisticated drilling techniques, deepwater rigs, and seismic wave and imaging technology have provided energy producers with greater opportunity to explore for energy commodities in previously inaccessible deepwater regions. Many energy producers view deepwater drilling as a relatively untapped frontier that could provide a source of production growth over the next few years. There are a variety of companies that could benefit from this trend, including deepwater rig manufacturers, energy and construction companies, and energy transportation companies.

Global deals and partnerships are also feeding growth. China, for one, is pursuing opportunities in gas. China National Offshore Oil Corp., known as CNOOC, was founded with a mandate to form joint ventures with foreign companies. Last year, the company took a 33 percent stake in Chesapeake Energy Corp. for a shale play in Texas. It made a separate investment for exposure to Canada's oil sands.

The longer-term view backs corporate investment expansion. The International Energy Agency said in its yearly outlook in November that oil demand will rise 14 percent between 2010 and 2035, from 87 million barrels per day in 2010 to 99 million in 2035. What's more, the net increase in oil demand will come entirely from the transportation sector in emerging economies.

To tap into the energy sector, investors can opt for individual stocks or may choose mutual funds or exchange-traded funds (ETFs). Here's a brief list of the top-ranked energy-focused mutual funds by U.S. News:

Vanguard Energy Fund (VGENX): Lost 1.7 percent in 2011; Up 3.8 percent over the past five years; 0.34 percent expense ratio

Invesco Energy Fund (IENAX): Lost 8.3 percent in 2011; Up 4.6 percent over the past five years; 1.1 percent expense ratio

Fidelity Select Energy Portfolio (FSENX): Lost 4.9 percent in 2011; Up 2.2 percent over the past five years; 0.85 percent expense ratio

Icon Energy Fund (ICENX): Lost 5.6 percent in 2011; Up 4.7 percent over the past five years; 1.24 percent expense ratio

Fidelity Advisor Energy Fund (FANAX): Lost 5 percent in 2011; Up 1.9 percent over the past five years; 1.16 percent expense ratio