If you think the stock market clobbered investors in 2008, you can take some solace in knowing that it could have been worse elsewhere. If you had invested in natural gas back in 2008 when it traded at about $13 per thousand cubic feet [McF], you have either sold it in frustration or are an extremely patient investor. Five years later natural gas is trading at just over $4 per McF. Could we be nearing a bottom though? We are likely in the early innings of a long baseball game where natural gas had dipped below $2 per Mcf last spring and certainly has room to run higher in the years to come.
Let's briefly cover what natural gas is as an investment and some of the reasons it may be worth having exposure to it in your portfolio. If you haven't been impacted by discussions or realized the potential effect of energy policy and the debate of its future, you could possibly be living under a rock. Speaking of which, what exactly is left under some of our own "rocks"? Believe it or not it's more than oil. Under our very own American soil, void of political issues, is a resource that is not only abundant but it's clean and extremely cheap.
Natural gas is found in deep underground natural rock formations. It's primarily created over time by biogenic and thermogenic processes. Without getting too scientific some of this is created due to sediment, marshes, landfills, and buried organic material. Another source of natural gas comes from shale formations. Shale gas only produced 1% of U.S production in 2000 but quickly grew to 20% by 2010. The Energy Information Administration predicts that shale gas will account for 46% of the U.S.'s natural gas supply in 2035. Shale gas exploration has also led to shale oil findings and some studies show that by 2035 this could reach up to 12% of the world's total oil production. Both shale and natural gas could clearly be a massive game changer in the world energy markets over the next few decades.
Natural gas costs less per mile than diesel. If that's the case then why is less than 1% of our country's transportation sector using it? Currently about 93% of fuel consumption in the transportation sector is oil-based. Oil has been the fuel of choice simply due to massive infrastructure that already exists. Most people don't know or recall that at one point in time diesel was not the leading fuel for heavy-duty trucks across our nation. About 90% of the heavy duty truck market was fueled by gasoline in the 1950's so it's clear that it takes time to adopt new technologies. If there existed infrastructure and ample natural gas fueling stations you would undoubtedly see heavy-duty truck users run immediately away from diesel, which now averages only six miles to the gallon!
Natural gas vehicles are still not available in large scale but that is just beginning to change. One current trend that we're starting to see is conventional gas and diesel vehicles being retrofitted to run on compressed natural gas (CNG). Vehicles running on natural gas produce less greenhouse gas emissions and emit almost 45% less smog-producing pollutants. Lastly, about 94% of U.S. natural gas consumed is domestically produced. How might that ease reliance on foreign oil if things continue to trend this way?
Let's move this natural gas discussion to what matters most in this post and that is how to play its potential as an investor. We typically love Exchange Traded Funds (ETFs) to help investors diversify and gain exposure to an asset class or economic sector with low costs and other efficiencies. All that being said, this is actually one area where you should expect some volatility and potential stomach aches but diversifying too much also mitigates your chances of doing really well. Since we're on the transportation theme … how about we present a "hybrid" solution of sorts?
Our take here is to first and foremost have some type of broad exposure to natural gas. That's best done with FCG (First Trust ISE-Revere Natural Gas ETF) which provides an easy way to track an equal weighted index of exchange-listed companies that have revenues in exploration and production of natural gas. We've nibbled at this for a few clients but again … this sector has a different wrinkle to it.
We add to this discussion the reality that investing in this sector will not only take some patience but also some selective skill. An investor will of course need to think long-term with optimism about the entire sector and potential growth catalysts but this is one area where we actually do NOT feel that "as the tide rises so will all the boats". This sector calls for being selective and extremely strategic.
With all that said, let's touch on a stock that is worth looking at. There are a number of ways to play the natural gas card while mitigating risks. Investors can gain exposure with several energy players like Apache Corporation (APA) or Chesapeake Energy Corporation (CHK). We're going to focus on one that is closer to "home"… with that of Clean Energy Fuels Corporation (CLNE).
Clean Energy is actually headquartered in Seal Beach, CA in an adjacent building from My Portfolio Guide, LLC. CLNE is the largest provider of natural gas fuel for transportation in North America. They are building "America's Natural Gas Highway", which is a network of 150 liquefied natural gas (LNG) truck fueling stations connecting major freight trucking corridors across the country. CLNE likely won't make money for a while as it's currently investing considerable capital into the much needed infrastructure that we alluded to earlier. If the trend toward alternative fuels and energy persists, investing in an early and market share leader like Clean Energy could be quite lucrative.
CLNE trades at around $13.84 as of this writing but it wouldn't be inconceivable to see it triple over the couple of years. There are some who cover the stock and see the potential to surpass $100 or even $200 per share due to the massive growth story that it presents. The other side to this story is that the company still doesn't make a dime in profits in these early stages and is bleeding cash in their efforts to build out the infrastructure for their natural gas highway. One last thing which we can't fully delve into here is that CLNE is a possible buy-out candidate for Pilot-Flying J Travel Centers. All of these high level views lead us to believe that investing in natural gas is much like a quote from the famous hockey great, Wayne Gretzky. He once said, "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."
In summation, the time to invest in something is usually not when it's already done well. Ideally, the more disciplined and savvy you are as an investor, the likelier you are looking for opportunities that are out of favor now but hold considerable upside in the future. Just like being in the early innings of a long baseball game, we think this is where we're at with investing in natural gas.