Five Ways to Profit from the Natural Gas Revolution
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The US is going through a deep energy revolution, as shale gas has transformed the country's energy landscape for good in recent years. This is good news for the US economy when it comes to energy costs and industry competitiveness, and it has key implications in terms of energy independence too. There are also some interesting alternatives to position your portfolio for gains from the natural gas revolution.
There are investment possibilities for every level of risk, and Boardwalk Pipeline Partners (NYSE: BWP) is one interesting way to bet on growing natural gas usage via a solid business with big fat dividend yields. The company owns three interstate natural gas pipelines covering more than 14,000 miles of pipe between Texas and Ohio, and is also the owner of 11 natural gas storage facilities. Pipelines have strong competitive advantages, since it's expensive and time consuming to build a new one, and there is not much economic rationality in building a new pipeline near an existing one.
Being a master limited partnership, Boardwalk gets the tax benefits of limited partnerships as long as it distributes a big part of its cash flows – more than 90% - to investors via dividends. At current levels, the stock carries a 7.8% dividend yield, which looks outstandingly good a context of ultralow interest rates. If you are looking for a rock solid pipeline bet on natural gas with a big dividend attached, Boardwalk may be just what you need.
Another possibility is going for more risky companies with enormous leverage in the natural gas revolution, like Clean Energy Fuels (NASDAQ: CLNE), which provides natural gas as an alternative fuel for vehicle fleets in the United States and Canada. The company is not profitable right now, but it’s undertaking enormous investments to build a big infrastructure network providing liquefied natural gas fuel to all kind of vehicles, especially to the cost-sensitive trucking industry.
America’s Natural Gas Highway, as the project is called, could bring enormous benefits for Clean Energy Fuels and its shareholders, but it would also have important implications for Westport Innovations (NASDAQ: WPRT). If vehicles are going to work on natural gas, they will need special engines, and Westport is a prime candidate in that area. The company provides technologies for natural gas engines, and works closely with different partners to develop the engines needed to ride the natural gas revolution.
Investors in Westport have been concerned about the fact that Cummins (NYSE: CMI), one of its major partners, has plans to develop its own heavy-duty truck offering. But Westport is still working side by side with Cummins on several other products, and the company has a big portfolio of patents for different applications in its industry.
Going back to Cummins, the company has become the largest manufacturer of natural gas and hybrid bus engines in the US, which could provide significant growth potential as the country moves towards the natural gas revolution. And it has expanded globally over the last years too; Cummins is major player in emerging markets via joint ventures with the largest truck makers in China and India. Both in the domestic market and the international arena, Cummins is well positioned to keep trucking strongly for several years.
Another interesting way to make money from cheap natural gas prices is to look for companies that use it as a production input, especially if they have some pricing power to sustain higher profit margins instead of translating all the savings to their clients. One interesting example is Dow Chemical (NYSE: DOW), which uses natural gas and many of its byproducts as an input for production of chemicals and plastics on a global scale.
The company's business is quite cyclical in nature, but Dow is well diversified both geographically and product-wise, and the company has been reducing debt and streamlining operations for better profitability. A strong tailwind in the form of low natural gas prices may be just what Dow needs in order to solidify its path to better times ahead.
The natural gas revolution is here, and you can profit from it through all kind of strategies with different combinations of risk and return. The only thing you shouldn’t do is ignore the changing energy paradigm, as it will probably have material implications in different areas of your life, including your investment portfolio.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels and Westport Innovations. Motley Fool newsletter services recommend Clean Energy Fuels, Cummins, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.