These Emerging Energy Plays are Worth Watching
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The domestic natural gas industry has a big problem in the form of simple economics. When supply is higher than demand, prices fall and when prices fall producer profits suffer. To combat this problem there are several companies working on the demand side of the equation that I think are worth keeping an eye on. I’ll be adding these high risk, high reward companies to the watch list of the paper trading portfolio “No Drip, No Mess.” I’ll be watching to see if these companies can really begin to make inroads to drive away the supply/demand imbalance and if they can do so profitably.
While in the states we have supply glut induced depressed prices, overseas it is a different story. Prices for natural gas are in the mid-teens in some countries while they languish in the low single digits here. To take advantage of this Cheniere Energy (NYSEMKT: LNG) and subsidiary Cheniere Energy Partners (NYSEMKT: CQP) are looking to build the Sabine Pass facility to export gas. The project won’t come on line until 2015 and a lot could happen domestically between now and then, however, at full capacity the company could generate gross profits of $5 billion per year which is substantial given the company’s current $2 billion market cap. I’ll be watching how the project comes along and to see which if either company is worth investing in.
The other big trend to watch in increasing the demand side is through natural gas as a transportation fuel. There are two ways to play this with Clean Energy Fuels (NASDAQ: CLNE) who are building out a network of refueling stations and Westport Innovations (NASDAQ: WPRT) who are building the engines that are fueled by natural gas. While we’ll never know the answer to the age old question about the chicken and the egg, we don’t need an answer for natural gas as a transportation fuel as both companies are working to the same end. In a lot of ways these companies go hand in hand but they are not the only ones trying to tap into this potentially lucrative business. The biggest thing I will be watching is to see which company can develop a competitive advantage and actually turn a profit.
Producers like Chesapeake Energy (NYSE: CHK) need the demand drivers that these emerging plays offer. They’ve invested directly into Clean Energy to give them the capital to continue their build out of America’s Natural Gas Highway. Chesapeake is investing a billion dollars in companies like Clean Energy as well as others that hold promise in driving up demand. It will be interesting to watch to see if other producers start to put capital behind companies that are working on the demand side of the equation.
In my opinion the domestic energy industry is one of the most exciting opportunities of the next decade. This is an industry that investors need to watch closely to see if winners do emerge. It still is fairly early for all of these companies but by positioning your portfolio to invest in future winners as they emerge you’ll have the potential to reap a windfall of future profits.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Buffalo Wild Wings and Darden Restaurants. latimerburned owns shares of Westport Innovations. The Motley Fool owns shares of Buffalo Wild Wings, Darden Restaurants, and Westport Innovations 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 Clean Energy Fuels 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.