3 Ways to Play Natural Gas

By Michael Birney - August 13, 2012 | Tickers: CQP, CLNE, GLNG, TGP, UNG | 0 Comments

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When is the best time to invest? At a bottom, and natural gas is definitely scraping along the bottom right now. We all know the story; fracking has led to a glut in the supply of natural gas, and huge supply inventories have led to historically low natural gas prices. So where should you be looking to profit from natural gas? Here are 3 ideas that investors would be foolish to ignore.

Clean up with CLNE

Currently there are an estimated 120,000-150,000 natural gas vehicles (NGV) in the US, and their total fuel consumption represent less than 1% of all natural gas usage on an annual basis. These numbers are primed to shoot up drastically in the coming years due to historically low natural gas prices, but not without significant investments. The most obvious downside to NGV ownership is the almost complete absence of NG fueling stations. Out of a total of 1,065 natural gas fueling stations only 499 are public. That is where Clean Energy Fuels (NASDAQ: CLNE) comes into play. CLNE designs, builds, operates, and maintains natural gas fueling stations, for light duty vehicles that run on compressed natural gas (CNG) and heavy duty vehicles that run on liquid natural gas (LNG). CLNE also sells equipment to convert vehicles to run on natural gas. So if the future is full of new or retrofitted natural gas cars and trucks, CLNE is positioned to take full advantage of the transition over the coming years. 

Unfortunately CLNE could run into trouble if truck fleet and car owners fail to adopt natural gas as their fuel of choice. Right now the Honda Civic Natural Gas Vehicle is the only NGV on the market, and at a considerably higher price point than a comparable Civic running on unleaded gasoline. What if you want to convert your car to run on cleaner, cheaper natural gas? Well that’s going to run you roughly $10,000 to have professionals install new tanks and engine components. There are just not that many options or incentives to buy a new NGV or convert an old vehicle, even if filling up is cheaper. That is unless Washington intervenes and subsidizes NGV adoption through tax credits, which it is considering doing through the “New Alternative Transportation to Give Americans Solutions Act of 2011”. The bill would give a $7,500 tax credit for purchasing new NGVs, and up to a $64,000 tax credit for heavy duty vehicles. Passage of this bill would give a huge boost to CLNEs profits making it a great addition to your portfolio.    

Liquid Natural Gas 

You often hear people say “we are the Saudi Arabia of natural gas.” In terms of supply yes, in terms of exports we’re not even close. But this is changing quickly and there are several ways to profit from the coming export boom. Cheniere Energy, Inc. (NYSEMKT: CQP) has been awarded exporting rights and is currently developing a liquefaction terminal in Sabine Pass Louisiana. These types of terminals are used to chill natural gas to -260 degrees thereby converting the gas into a liquid, essential for exporting as it converts gas to liquid at a 600:1 ratio.  

Also essential for LNG exports are the tankers that transport the fuel. Although many companies are in the process of building more of these tankers, they won't be ready for a few years. Fixed supply along side growing demand for these types of carriers creates a fantastic opportunity for profits. The major players in LNG shipping are Golar LNG (NASDAQ: GLNG) and Teekay LNG Partners (NYSE: TGP). Golar has 10 LNG carriers and 3 floating regasification units while Teekay has 20 LNG carriers. These shippers also have the added benefit of global exposure, in case the US LNG export market never fully takes off.   

ETFs

Anyone who has held onto a natural gas ETF over the last few years will probably feel queasy over the suggestion that they are a great play but hear me out. United States Natural Gas Fund (NYSEMKT: UNG) has been an abysmal ETF since 2008. Reverse splits just to stay listed, and epic losses that have outpaced the decline in natural gas have made UNG almost universally despised. That was the past. UNG is largely tied to the spot price of natural gas so while that was a problem in the past, it is exactly why UNG represents a great investment opportunity moving forward. Increased demand for the commodity will drive UNG way up, in spite of its flaws.

Bottom Line

Natural gas is cheap ... really cheap, but only in North America. To put this in perspective European natural gas has been trading around $11 per million British thermal units (mmBtu), Asian natural gas around $18 per mmBtu, while in North America it’s been under $3 per mmBtu since February. The fact that it’s so inexpensive right now is itself evidence that there is insufficient demand, we simply can’t put it to use. That is why there is a major push by some, most notably T. Boone Pickens, to use the excess supply for vehicles. Others are betting big on the export play, and looking at the huge spreads above a fantastic arbitrage opportunity. The glut in supply will find demand either domestically or abroad (likely both) over the next few years and natural gas prices will rise. The past few years have been tough on many of the stocks and ETFs listed above but that’s all about to change.  

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