Can Bud Climb Higher with Natural Gas in the Tank?

Anyone that’s been to the men’s room at half-time during a football game is well aware that a little beer can generate a fair amount of methane, the principal component of natural gas. Turning the tables a bit, it was interesting to hear that Anheuser-Busch InBev, the U.S. ADR that trades under the symbol BUD, is in the process of retooling its delivery fleet to run on compressed natural gas or CNG as it’s known in the trade.

BUD’s move is motivated by two factors; the first is that Nat. Gas, although off its lows, is very cheap in comparison to other fossil fuels and the second was a grant from Clean Cities, a public-private partnership that promotes alternative fuel vehicles. Clean Cities received $300MM from the American Recovery and Reinvestment Act this past August. The second reason also seems less important to Phoenix Beverages Inc. a NY Metro distributor with 150 trucks on the road, 20 of which will make the switch.

“We’re going forward with it regardless,” Greg Brayman, VP of Business Development for Phoenix. “It’s good for the environment, and probably in the long run it’s better for costs.”

CNG produces 25% less CO2 than gasoline or diesel and while trucks are only responsible for about 12% of total emissions, the double bang of economic and eco-sensitive benefits makes it a hard choice not to make. Christina Ficicchia, the executive director of the New York City chapter of Clean Cities thinks: “Our niche has really become private delivery fleets.” Richard Kolodziej, president of Gas Vehicles for America agrees saying: “You can put in one or two stations in an industrial park and serve a whole slew of fleets.”

There is also little chance that, like oil, the supply of natural gas has peaked. Aubrey McClendon, CEO of Chesapeake Energy (CHK) was asked recently when he thought North America’s shale-gas resources would pass its prime. His response: “With all due respect to you and me, we’ll both be dead.” A more exact number of 118 years was put on it by Navigant Consulting.

If there is a downside in all of this, it is for the exploration-and-production industry which feeds on high growth. Capex in E&P, as it is known, has outstripped cash flow for most of the last decade according to James Murchie, founder of Energy Income Partners LLC. This compares to the 41% invested in exploration by Exxon Mobil (XOM). The E&P game works fine while prices are rising but a chart of the price of natural gas doesn’t seem to have a positive slope.

The BUD ADR has been trading since June of this year and has climbed steadily as the CDS has moved lower. The stock peaked on 9/21 at $47.70 just days before the CDS bottomed at 36bps. Both have reversed some since then but the trends appear intact.

The CDS/equity combo for CHK has been choppy for most of 2009 but after a recent peak in the CDS (755bps on 8/17) the probability of default has lessened markedly as reflected by a drop in CDS levels to 487bps on 9/23. The stock moved to its highs for the year during the CDS move closing at $29.11 on 9/22 and $28.30 last night.

XOM’s stock has had an up and down year moving between $64 and $74 like a tiger pacing in a cage, which is not to be confused with the “tiger in your tank” ESSO used to ask you to put in there. The CDS has been choppy too, but has moved from upper left to lower right on the graph in the process.

With Wall St. II in filming, maybe this time around Gordon Gecko will say “Gas is good.” As long as it’s “natural” that is. Easy on the beer boys!

Comments

[buyitcheap:]

Ah, another Pickens convert. I am long GAZ but looking at UNG still and waiting for a pull back to go long, and overweight, foreign producers, and the MLPs in the gas space,

Oct 01 08:23 AM

[redbaron:]

I am also long NG, owning CLNE, COP, XTO and several others. Converting more fleets to CNG has to happen, IMHO, for the good of our nation.

Oct 01 08:31 AM

[TShinn:]

This is wonderful - natural gas is the only alternative fuel that can provide a clean energy solution, utilize a domestic energy source, and efficiently power a heavy-duty vehicle (the largest consumers of foreign oil and polluters). Natural gas is an American energy answer.

Oct 01 11:48 AM

[meridian575:]

Great Article!! I came across an article on Yahoo Finance that discusses the DOE Clean Cities intitiative that you have discussed above in some detail. Take a look at the following link:
finance.yahoo.com/news...

Oct 01 04:38 PM