Powering America's Future: How You Can Profit
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently the Energy Information Administration (EIA) published projections for future electricity generation through the year 2040. While coal-fired power plants currently have the largest share of electricity to the US power grid, and will continue to have it, natural gas is projected to make large gains.
Chart Courtesy of The EIA
Having a glimpse of the future often can provide investors with the insight needed to profit over time. Knowing that natural gas extraction, transportation, and use will increase over the next 25 years gives a starting point for finding the right ways to play this sector.
Fill 'er up!
The logical place to start would be the USA's #1 natural gas producer, ExxonMobil (NYSE: XOM). While the price of oil has been declining, and the EIA crude oil projections show that trend to continue through 2014, natural gas prices have been increasing. In fact, the EIA natural gas projections show a very bullish long-term outlook.
Chart Courtesy of The EIA
Knowing this information made the results for ExxonMobil's first quarter (Q1) of 2013 highly predictable -- declining revenue from liquids that were partially offset by increased realizations from its natural gas operations. Though natural gas represents less than 10% of total sales that number should increase due to capital and exploration expenditures that were up 33% year over year, much of that focused on natural gas. The result is a more stable business with dual income streams.
ExxonMobil knows that the natural gas boom isn't just limited to the USA. In fact, where the USA goes the developing world often follows.
Overseas, the Tolek gas field in Malaysia commenced production and major finds in Tanzania were announced in Q1. While U.S. natural gas prices have stabilized in the profitable $3.80-$4.20 range, non-U.S. prices are continuing to increase and these foreign projects will contribute heavily to the top and bottom line in the coming years.
Has Chesapeake bottomed?
A more promising but somewhat riskier play would be Chesapeake Energy (NYSE: CHK) which represents an almost pure natural gas play. The recent quarter marks, in my estimation, a pivot point for this company.
The departure of their founder and former CEO paved the way for a more mature and stable company. While there is no denying the savvy it took to create this business, maintaining a company of this magnitude requires a more steady hand.
Over the last 12 months increased revenue from the growing liquids sector has added to overall profitability and stability. Production in both liquids and gas increased while operating costs decreased. Now factor in higher natural gas prices and this stock could be poised for some significant gains if their new CEO, Robert Douglas Lawler, can capitalize on these conditions.
The street seems to be coming to this view as well, with average earnings estimates up almost 20% in the last 90 days for FY 2014.
Buy and hold forever!!!
This pipeline and storage company recently suffered a 10% pullback from record highs. This could be the buying opportunity patient investors have been waiting for.
Over the last five years it's no fluke that a solid base accumulation trend line has developed. Two main reasons for this would be a generous yield combined with a Dividend Reinvestment Play (DRIP) and a strong parent company with no need to dilute or sell shares.
Kinder Morgan Energy Partners currently has a 6.15% yield and a track record of increasing dividends. In fact the last five quarters all saw consecutive dividend increases adding nearly 15% to the existing yield.
A Return on Assets (RoA) of 5.60% of is better than the industry average of 3.10%. The RoI of 6.40% is also greater than the industry average of 4.60%. This has lead to superior growth vs. competitors.
If energy is the lifeblood of modern industry, Kinder Morgan Energy Partners is the vascular system. An indispensable part of modern industry that has high barriers to entry, assured demand, and a reliable income stream, make this stock one of my top buy and hold picks.
Natural gas use will assuredly increase in the coming years. But there are several ways to capitalize on this sector. For the safe investor it seems ExxonMobil offers stability with minimal but increasing exposure to this sector. The more aggressive trader might appreciate the recovery potential of Chesapeake Energy. While the dividend oriented investor might appreciate a high yield of Kinder Morgan Energy Partners. No matter the investing strategy, there is a stock for you and therefore no reason to be left behind in this energy revolution.
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James Catlin has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!