Do You Really Know What Natural Gas Offers the Investor
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While we have heard how the low prices of natural gas has hindered many businesses because of revenue shortfalls, I believe investors will find a pot of gold at the end of the rainbow. Not many people have seen it but many of the opportunities abound for investors in both growth and income investing. Let’s look at what natural gas has done right now for some utilities and what it can do for some midstream companies in the next 18 months.
Low Natural Gas Prices help Consumers and Build Infrastructure
Natural gas is slowly morphing into the energy source of the future, pushing coal out of the way in the United States. As this continues the demand for natural gas will continue to increase and as this happens, natural economic factors will increase the price with demand. Presently, it is my opinion that technology advancements that have brought the abundance of natural gas to us just came too fast. Demand for the product and the technology to deliver it overseas (which does not exist yet) just was not there. For this reason the glut of natural gas reduced prices.
In the utility industry, the move is on to transform into natural gas instead of coal and this is being coaxed along by the Feds. The U.S. energy structure continues to change with the abundant supply of natural gas and EPA making it harder and harder for older coal power plants to make money. Who benefits from this landscape change? The regulated utility infrastructure and consumers are the ones who benefit. These are mostly dividend-distributing companies like electric, gas, water pipelines, the regulated utility sector. They don’t benefit because of lower fuel costs, but the lower utility bill that is passed on to the customer and this could lead to more use and more profits for the company as consumers may use more power at lower prices.
At the same time though regulated utilities may be able to invest in new infrastructure without raising utility costs. And this is happening all over the country as power companies rebuild to accommodate for natural gas instead of coal.
Power companies are increasingly switching to natural gas to fuel their electricity plants, driven by low prices and forecasts of vast supplies for years to come. Sometimes plants are being converted from coal to natural gas, sometimes coal plants are just closing. Congress is spearheading this effort as the controversial “carbon footprint” pricing is expected to eventually take hold in the utility industry. In 2013 for example, coal is expected to slip to 10% of new capacity while natural gas will climb by 82%! Xcel Energy (NYSE: XEL) is converting a plant in Denver to natural gas while shutting down a coal burning plant in Boulder,CO. This will save them $225 million alone. Calpine Corp (NYSE: CNP) is converting some older plants in Delaware and New Jersey it bought from Pepco Holdings instead of re-outfitting them for coal. So this conversion will take some time, but it will eventually raise the demand for natural gas which in turn will increase prices. The technology bringing in the natural gas exceeded the usage so prices are way down and it will take time for usage to pick up and pricing to follow.
Midstream Delivery Companies are the Growth Companies of the Future
With this growth comes the need for transporting the gas. Midstream companies like Enterprise Products Partners (NYSE: EPD) that is heavily invested in natural gas energy services among others should benefit. It has over $7 billion in projects on its plans for delivery and storage expansion. Companies like EPD should have the incredible opportunity to keep growing. Aimee Duffy wrote an article about midstream companies and explained the opportunity:
“Every time you read about how much oil and natural gas the U.S. is producing right now, realize that all that energy needs to be gathered, processed, stored, and transported to refineries and other consumers.” And these companies can weather price movements well with minimal affect. She goes on to write:
“Most midstream outfits operate a business model based as much on fee-based contracts as possible, which means that unlike with our energy producers, it doesn't matter to midstream companies if the price of oil and gas falls to $1 or rises to $100.”
An example of EPD’s good fortune can be seen in the Eagle Ford Shale development in Texas. SM Energy (NYSE: SM) has had this region as its main focus pouring in almost 50% of its developmental capital here, but it has been difficult to find sufficient infrastructure to handle the boom of gas and oil production. SM Energy is expanding to 289 million cubic feet per day by the end of the year and will face constraints. Enterprise Products Partners is building an additional train to its Lavaca County cryogenic natural gas processing plant that will add an additional 300 million cubic feet per day at the facility.
As the demand for natural gas continues to grow, simple economics will increase the price. Delivery will become a big business and companies like Enterprise Product Partners will make excellent growth investments. It seems like everything is working out to offer a great growth opportunity for investors. The low natural gas prices are allowing regulatory utilities to refit existing plants for natural gas and every time one is finished, the demand for natural gas increases. Prices will increase and delivery will also become a big business.
johnmylant has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. 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.