Investing 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.
Natural gas is a cleaner energy source than oil, and it’s now becoming more abundant than ever in the US and other parts of the world thanks to recent discoveries and technological advancements. If environmental concerns about fracking can be successfully managed over the coming years, natural gas could become the main driver of a full blown energy revolution which would have important implications for the word economy and every investor's portfolio.
Big Energy: Risks and Opportunities
The transition towards natural gas will have important implications for companies all over the world, but making the right bet is not easy at all. Pure natural gas stocks like Chesapeake (NYSE: CHK) have a lot of potential, but they are also very vulnerable.
Chesapeake has been so aggressive in expanding exploration and production over the last years that the company could be in serious trouble if gas prices remain depressed due to excessive supply. In the long term, natural gas prices should remain high enough to incentivize production, but Chesapeake could have a very hard time in the meantime.
This also means a potentially serious problem for aggressive oil companies like Brazilian Petrobras (NYSE: PBR). The company has discovered enormous potential in pre-salt of shore crude oil reservoirs, and is planning to invest $236.5 billion during the next five years to profit from this opportunity. However, low natural gas prices could be a drag for oil prices in the middle term, and this could severely damage the viability of the company's new projects, which are very expensive to develop because of geographic and technological issues.
A good alternative could be ExxonMobile (NYSE: XOM), the company has made some early investments in the sector which could have a big payoff if demand for the commodity continues rising in the middle term. After acquiring natural gas giant XTO in 2009, Exxon has become one of the biggest players in the industry. The company has abundant financial resources and a solid track record of efficiency and profitability, so Exxon is a low risk bet on the natural gas boom among energy stocks.
Betting in Natural Gas Usage
Kinder Morgan (NYSE: KMI) owns the largest network of natural gas pipelines in the United States, with more than 62,000 miles of pipeline connecting the major drilling areas to demand centers all over the country. The company charges a mixture of fixed and volume-based fees for transporting and storing fuel, so it depends on consumption, not prices to support its cash flows. Kinder Morgan is an unequivocal beneficiary from the natural gas revolution, and the company pays a juicy 4.4% dividend yield while investors wait for gas to become the fuel of the future.
There is a big opportunity for natural gas as a vehicle fuel, especially when it comes to trucks and fleets with heavy fuel consumption. Clean Energy Fuels (NASDAQ: CLNE) is making the change possible by investing heavily to build a comprehensive network of natural gas fueling stations along the country’s major interstates, called America's Natural Gas Highway. This is a demanding project, but it provides tremendous leverage to increasing natural gas usage in transportation.
The company is unprofitable, and the America's Natural Gas Highway project demands tons of capital which is invested under uncertain conditions, so Clean Energy Fuels is a risky investment. On the other hand, if things turn out as expected for the company, it could deliver truly exceptional gains over the next years.
The natural gas boom is already having important economic implications, and over the following years we could experience a real energy revolution in the US. There are different alternatives to bet on this new energy paradigm, and it’s a great opportunity to energize your portfolio with a clean and abundant fuel.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels, Kinder Morgan, and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Clean Energy Fuels, Kinder Morgan, and Petroleo Brasileiro S.A. (ADR). 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.