What potential does natural gas have in making serious inroads into becoming a viable alternative to gasoline or diesel powered vehicles? Investors Business Daily discusses some of the obstacles and opportunities natural gas has as a vehicle power source for commercial and residential vehicles.
Original date of publication was April 10, 2012.
Beyond the cries and groans over high gas (petroleum) prices in the U.S., a very different picture for energy consumption is being painted. The U.S. in the last 5-6 years has established itself as the world’s natural gas giant. The supply is so strong that the U.S. natural gas market is in the midst of a crisis based on oversupply and weak demand.
The price Americans are paying for natural gas compared to other countries is astonishingly low. For example, in Australia an average consumer would pay over 6 times per million BTU (British Thermal Unit) for natural gas than would be charged in the U.S. This is astonishing in that if you were to use a gallon of petroleum selling for $4 and multiply it by 6 you’d get a result of $24 per gallon!
(As of March 2012)
Why does the U.S. differ so much in terms of natural gas pricing compared to other countries around the globe? Two main causes can be identified. First, hydraulic fracturing (often referred to as fracking), a relatively new phenomenon in the exploration and extraction of natural gas was born in the U.S. The U.S. market is now reaping the benefits of being an early adopter of this technology. Secondly, the ability and infrastructure needed to transport natural gas to the degree that oil is transported globally is lacking.
The world has two main indices for oil because it is a commodity that is moved throughout the world with relative ease. This is not true for natural gas. Part of the problem stems from infrastructure and part from the nature of natural gas. In the U.S. the development of ports to load natural gas for exporting purposes are few and far between. This is because it was not until the last few years that the U.S. was considered a candidate for the exportation of natural gas. Ten years ago natural gas prices were much higher and fears of shortages loomed. The entire conversation amongst those in the natural gas industry was how the U.S. would need to import liquefied natural gas (LNG) via cargo tanker. LNG is the other hurdle of why natural gas is not transported as readily as oil. When transporting natural gas on a cargo ship it must be in the form of LNG. Thus, the natural gas must be cooled to the point where the vapor becomes a liquid and then placed in a controlled container to make transportation viable and safe. This process is not as nearly direct as filling a barrel full of oil, sealing it and throwing it on a cargo ship.
Even with these hurdles, the markets around the world are demanding the discounted natural gas prices the U.S. is currently experiencing. To meet this demand a number of companies exist that operate LNG tankers. One such company at the end of March had an IPO. GasLog (GLOG) is a LNG transportation company operating a fleet of tankers. It is positioned well to benefit from low natural gas prices in the U.S. and high natural gas prices abroad. In December the company plans to begin quarterly dividend distributions at 11 cents. At current prices (approx: $11.30), this would mean the annual yield for an investor would be around 3.9%.
I am of the opinion that GLOG at current prices is a buy for long-term investors with a 2+ year time horizon. According to Exxon, world energy consumption of natural gas is expected to increase 1.6% annually of the next 30 years, while general energy demand is expected to grow at .9%. Thus, natural gas is expected to grow 78% ((1.6-.9)/.9) faster than the overall energy market. This increased growth rate will have ramifications. One of the ramifications being that GLOG will be providing a service that is demanded more and more throughout the world.
What you will find inside…
- Why it might not be a bad idea to establish a short-position to hedge your investment bets & how this can easily be done. ETF investment idea provided.
- What emerging cultural shift is occurring in China and what this means in terms of investment opportunities.
- An updated portfolio performance table.
- Why the future value of your money matters and how you should consider this factor when making purchasing decisions.
What you will find inside….
- Why Liquid Natural Gas (LNG) is an attractive investment given the large differences in natural gas prices throughout the world compared to the U.S.
- What IPO debuted in March that provides LNG transportation services throughout the world and what you should expect from the company when it anticipates paying dividends in the 4th quarter
- One area of the data collection revolution that is likely to not feel the criticism of privacy advocates and how one company is positioned to provide real economic value to companies who would benefit from more effective and less costly monitoring services
- An updated model portfolio performance table
- Cars, reoccurring costs and considering what you forgo when you make a purchase – Opportunity cost matters
If you rely on natural gas for heating your home, you’re in luck this winter. Yet again, consumer natural gas prices are headed downward. This trend is not new. For the last 4 years gas prices have felt the pressure of excess supply. The reason for the supply glut is the result of a revolution that is occurring in gas exploration. A relatively new drilling technique commonly refereed to as fracking (horizontal drilling conducted by hydraulic fracturing), has given birth to the ‘shale gas’ revolution.
- Idaho Intermountain Gas reduces prices by 4.4%
- Piedmont Natural Gas reduces prices by 7%
- Connecticut Light & Power reduces prices by 7.5%
- New Jersey’s PSE&G reduces prices by 4.6% (which totals 35% since ’09)
What’s quite interesting from an investment perspective are the challenges and opportunities that this new revolution has caused. For example, many of the new gas fields that are being developed are in regions that lack the infrastructure to transport gas via pipeline from the field to the refinement center. As a result, rail lines/cars from companies like Union Pacific (UNP) are seeing a increase in demand in places like North Dakota.
Another interesting point to ponder is the fact that natural gas does not have the distribution network oil has. Companies can transport liquid natural gas across the ocean, but it takes infrastructure to accomplish this task. The infrastructure is lacking because of decades of countries (like the U.S.) having limited supplies of natural gas. Therefore, the thought out exporting the product was more or less preposterous.
Being that the U.S. is swimming in natural gas and cannot easily export the product overseas, U.S. consumers of the product are in a great spot to enjoy depressed prices.
Look forward to the January edition of TheMarketCapitalist.com newsletter. I will be exploring further ways for investors to benefit from the boom in natural gas production.
When I was an undergrad I remember the college I went to had an “American Dream” lecture series. The business department brought in various speakers each semester to discuss some type of business venture they were involved in. It was an event that engaged both the community and student body. One semester the speaker was an owner of a petroleum distribution company. The lecture was interesting, but what sticks with me most was his discussion about the prospect of importing liquid natural gas (LNG).
At the time of the lecture the price of natural gas was around $7 MMBtu. This was a significant increase over what it had been only a few years before. Since that time the current and projected supply of natural gas in the U.S. as increased dramatically. The price of natural gas now rests around $4 MMBtu and energy companies across the U.S. are looking to export their supply.
Japan’s recent earthquake and nuclear fallout have causes some European countries to take a staunch anti-nuclear position. Some ‘green’ energy sources will make up the slack, but some other major energy source will need to fill the bulk of the void. The Russians in the past few years have used their natural gas lines for political purposes. No country wants to be a position of being held hostage by another country. Across the Atlantic the U.S. finds itself in a position of having an oversupply of natural gas. Do you see an emerging need and solution?
Last month the Department of Energy gave approval for Cheniere Energy Inc. (LNG) to export 2.2 billion cubic feet of natural gas per day from its Sabine Pass, La. port. This is the first time the U.S. has approved the export of natural gas from a source in lower 48 states. Exports are set to start in 2015.
The prospect of exporting natural gas overseas could potentially gain momentum depending on how other sources of energy and geopolitical situations change in the coming years. A number of variables are at play here, so the end result is not clear, yet you should be aware of the current trend/direction that the natural gas markets in the U.S. are moving.
I always find information such as what I’ve discussed above as a helpful tool in terms of placing other events in a more accurate perspective. For example, if I have somewhat of a handle on the natural gas industry, it will help me better understand the potential impact of the growth or demise of another form of energy. Knowing how players relate to one another is important. In this case, knowing the potential of an energy source can help you as you process additional information about the limits or potential of competing energy sources.
Disclosure: No Position
Related post: Mexico’s Need for Natural Gas Spells Opportunity
The quest for specific types of energy sources can cause one country or company to be at an advantage over another country. Mexico is a country that over the past decade, and into the foreseeable future, is planning to expand its reliance on natural gas. For energy companies in the U.S. this need poses an opportunity. Where a need exists an investment opportunity is born.
For over the past decade Mexico has substantially increased its capacity to generate energy via natural gas power. Between 1999-2009 natural gas power generation in Mexico has increase 257%. The Federal Electricity Commission of Mexico is still continuing its push for more natural gas powered plants. According to Barclays, in 2024 an additional 19,000 MW of natural gas plants could be brought online.
The Barclays report goes on to discuss how the push for natural gas fired plants is causing a surge in liquid natural gas (LNG) imports via various sea ports in Mexico. Though shipping is effective in getting greater supplies to Mexico, the more efficient way would be direct pipeline transfers from the U.S. The capacity exists and if the expansion of natural gas plants in Mexico continues, the lines will be utilized to a greater extent than ever before.
Assuming that Mexico is years away from establishing domestic production to counteract the need for substantial imports, how can an investor benefit from Mexico’s natural gas need? If pipelines make the most sense in terms of efficiency and economics, then what companies exist that already have lines running into Mexico for natural gas transfers?
One company that operates in the San Diego area of California, but has natural gas pipeline exposure in Mexico is Sempra Energy (SRE). SRE is utility company with a market cap of 12.5 billion. It has a 3.6% annual dividend yield. Its last quarterly dividend payment increased its dividend from .39 to .48 (a 23% increase). Its payout ratio is 45% and has a beta of .5
|Company||Price (6/22/11)||Yield||Payout Ratio||Beta|
SRE is a value stock, but is likely to find itself in a beneficial situation with Mexico’s increasing demand for natural gas. A portion of SRE’s business lines are dedicated to the operation of LNG receipt terminals in the U.S. and Mexico and the pipeline and gas storage facilities that run from the U.S. into Mexico. SRE is well positioned to capitalize on growing Mexican hunger for natural gas.
As I have written before, I constantly look for value companies that have some form of a growth component in their business model. In such cases investors can capitalize on the best of both worlds; growth and value. In a climate where Mexico needs more natural gas and the U.S. has an oversupply, SRE is one company that already has the infrastructure necessary to fulfill the need.
Whether it is SRE or another company with pipelines or some other natural gas exposure in Mexico, you are aware of a trend for at least the next decade. Now is the time to find well positioned companies and begin to place your portfolio in a position to thrive.
Disclosure: No Position
In the later part of March this year President Obama made a number of comments that expressed his support for using government incentives to bolster natural gas usage in the U.S. Since that time The New Alternative Transportation to Give Americans Solutions of 2011/The NatGas Act 2011(H.R. 1380) has been in the House.
Though a lot of more flashy energy sources, mainly wind and solar, have received a good deal of press and government subsidies, natural gas has largely gone unnoticed until recently. T. Boon Pickens has certainly been one of the driving forces to bring natural gas to the forefront of the U.S. energy demand. Yet, the real driver behind the emergence of natural gas is the fact that there is more than most people ever expected being found within the U.S., its historically low prices and its wide spread usage as a source of energy in the country.
In 2009 an estimated 25% of domestic energy consumption was provided via natural gas. Regular consumers know of the energy source primarily because their heater, stove, dryer and hot water heater often run of the energy. Most do not realize that natural gas and its liquid cousins are an alternative to gasoline in motor transportation. Currently, only around 1% of vehicles in the U.S. use liquefied natural gas as their source of energy.
The HR1380 bill would provide incentives for businesses and individuals purchasing or modifying a vehicle to run off of natural gas. The bill would also extend the current 50 cent a gallon on liquefied natural gas. Needless to say, the passage of HR1380 would greatly benefit companies involved the in the production of natural gas and natural gas components (particularity those dealing with vehicles.)
For interesting investors, keep your eyes and ears open about the standing of HR1380. If the bill is able to gain traction, then it will have direct investing implications.
If you don’t know where to start your investing research, I’d say to look at Wesport Innovations (WPRT). The companies involved in “research, development, and marketing of low-emission engine and fuel injection systems that utilize alternative gaseous fuels, such as natural gas, propane, or hydrogen. It develops technology and products that enable light, medium, and heavy-duty diesel engines to run primarily on compressed natural gas (CNG) or liquefied natural gas (LNG).” WPRT would directly benefit from the passage of HR1380.
Disclosure: No Position