5 Natural Gas Producers to Watch
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Natural gas has become the energy detail to watch. Understanding the ups and downs of natural gas prices and how they effect the profitability of major oil companies, is the key to a good portfolio.
The winters of 2011 and 2012 were comparatively mild. As a result, consumers used less heat (and therefore used less gas in their heat) in homes and businesses. Nine months later, we have a natural gas surplus. If there is anything the supply and demand model has taught us, it is that an abundance or oversupply of something, means prices go down. Natural gas is now 80% cheaper on average than the previous decade. Good for consumers, bad for large gas producers. Why? For the first time, gas sold for less than what it cost to produce. The producers had to take a hit.
The large gas producers, or energy stocks, all felt a little ding from the falling prices. ExxonMobil Corporation (NYSE: XOM), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP) and Chesapeake Energy (NYSE: CHK), just to name a few, are some of the companies affected.
How concerned should investors be about natural gas prices?
In fact, now would be a good time to buy energy stocks if you do not currently own one. But chances are, you already do.
ExxonMobil is one of the most popular retirement stocks out there. And why shouldn't it be? It has steadily climbed over the past ten years, and offers a healthy dividend. It isn't a flashy stock, and the company is well-diversified, insulating it against losses in one area for long.
ExxonMobil has been getting more involved in natural gas drilling while other companies have pulled back. The company (according to its website) believes natural gas will be the fastest-growing major fuel between now and 2040. And why shouldn't it think that? Southern Company, an Atlanta based electricity generator, gets 47% of its electricity from natural gas. Across the United States, electricity generated by natural gas plants has increased more than 50% over the last decade.
The use of natural gas in vehicles has increased dramatically, and is likely to continue to increase. With many states imposing cleaner energy requirements on local governments, natural gas fleet vehicles will continue to increase. According to Reuters, natural gas demand in fleet vehicles and large trucks could reach as much as 14 billion cubic feet per day come 2030. As of 2011, the rate was only 90 million cubic feet per day.
Chesapeake Energy owns 2.2 million acres of natural gas shale fields in the U.S. Remember how above it says that gas now sells for less than it cost to produce? Right now that is a problem for a company like Chesapeake that has a lot available to drill. It is not cost-effective to drill during the gas price slump. But the company boasts great net profit margins. It is in a very safe and healthy zone for a stock. The company is poised well to meet future demand and long-term growth.
Chevron is in a category of its own. The company actually has little exposure to the natural gas problems. It has $21 billion cash on hand, and only $9.87 billion debt, fueling rumors that the company may be in the market to acquire some other companies. And the rumors like to suggest that a natural gas producer would be a good acquisition (buy one now while prices are low).
Are you wondering yet why the natural gas producers don't just export some of their excess? After all, if the prices are down partially due to warm weather, that geographically limits the situation. Other countries and regions have different weather. The U.S. exports very little natural gas, and what it does export, goes to Canada and Mexico via pipeline. To send natural gas anywhere else (Europe, India, Asia), requires turning it into liquified natural gas (LNG), and put in a tanker ship. This isn't something all companies are equipped to do. In fact, there is only one LNG export facility in the U.S. and it is in Kenai, Alaska. ConocoPhillips has sent small amounts of LNG to Japan via Kenai. Kenai was scheduled to be idled this past spring. But the LNG surplus came right as Japan needed more, after the earthquake and tsunami created both supply shortages, and a higher demand.
Obviously, other companies would like to be able to export extra LNG as well. However, this requires building terminals, getting permits from the Department of Energy, and much, much more. As of right now, 15 applications have been entered, and one has been approved- Cheniere Energy (NYSEMKT: LNG). Ironically, (or is it symbolically?) Cheniere was approved for an export terminal right next to its LNG import facility. Import? Yes. Cheniere built its facility several years ago when it looked like the U.S. would need to import LNG. It wasn't long thereafter that shale gas drilling took off. The facility now sits idled.
ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls 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 Chevron. 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.