Seeking Alpha
Value, deep value, contrarian, special situations
Profile| Send Message|
( followers)  

Summary

  • We have experienced an industrial revolution, technological revolution and are now entering an energy revolution. It will be the next major growth area.
  • The economics behind the move to natural gas makes total sense. Fracking has already driven down prices in a major way.
  • The U.S. is well on its way to energy independence.

Many of us remember the technological revolution, which began in the 90s and, in some ways, continues today. We saw productivity skyrocket and technology stocks literally trade through the roof. Today, I want to address what I believe is the next revolution here in the United States. To be honest, I never thought I would see a new energy revolution in my lifetime.

Much of the impetus for this new revolution comes from George Mitchell, a successful energy developer and the founder of Mitchell Energy. He will be remembered as a leading force in the development of fracking or hydraulic fracturing, the process by which hydrocarbons are recovered from shale rock. It took him 17 years to perfect the drilling method to the point where it was economically viable.

Back in the 90s, the inflation-adjusted price per million British Thermal Units of natural gas was around three dollars. Production slowed significantly, and the price of natural gas steadily rose to around $14.00 by the mid-2000s.

Since that time, the price of natural gas has fallen to as low as two dollars per mBTU due to the fracking process. Today's price is approximately $4.60. Keep in mind that all of this happened at a time when oil breached $100 a barrel, and when gasoline prices have remained high.

According to the Department of Energy, the proven reserves have grown from 211,000 billion cubic feet to 335,000 billion cubic feet from 2006 through 2011. That is an increase of over 59% in five short years. Today the United States has the largest recoverable reserves in the world. As a result, we have the lowest prices for natural gas. In Europe, for instance, the price per million British Thermal Units is over $12.00, as seen below.

In many parts of the world it is over $14.00.

The Holy Grail would be converting natural gas for use in personal vehicles. We still have a little way to go in making that economical, and I will address that in greater detail later in this article. It is, however, economical to convert large trucks and buses to natural gas. This is so for two reasons -- first, the size of the trucks allows for larger tanks in which to store the gas; and second, the refueling process currently takes overnight to complete.

We currently import four million barrels of oil a day. According to Boone Pickens, a world renowned expert on energy, if we were to convert six million trucks to natural gas, we could cut the imports to one million barrels of oil a day. That is 75% of our import need. I believe it will not be long before we are totally independent of foreign imports.

The economic reason for converting trucks or personal vehicles to compressed natural gas is simple. Today the national average for unleaded gas is around $3.51 per gallon. The equivalent in compressed natural gas would be approximately $1.50 cheaper. Bankrate.com. That would be tantamount to a 40% savings in fuel cost. I realize there are other costs that must also be considered.

At this point, I want to come back to the "Holy Grail" of energy, which is use in personal vehicles. The first obstacle I should address is the difference in the cost of vehicles at the dealership. Compressed natural gas vehicles cost approximately $10,000-$12,000 more than their gas-burning counterparts. Another obstacle is the cost to put in a fueling station at home, which currently runs about $4700, assuming you already have a natural gas line running to your home. I am hearing, however, that General Electric (NYSE:GE) and other companies are producing a home base station for approximately $500. As you can see, with a 30% to 35% savings on fuel, a personal vehicle would have to drive almost 200,000 miles just to breakeven.

Another barrier to the viability of personal vehicles is the size of their gas tanks. Compressed natural gas requires much larger tanks and restricts the miles the vehicles can travel. Pickup trucks are less restrictive, because they can put larger tanks in the beds. I am confident, however, that the efficiencies of natural gas will someday in the near future make it cost effective for personal vehicles. And who knows? Maybe someday we will have the technology to put liquid natural gas into our personal vehicles.

As you can see, there is the potential for tremendous savings in the use of natural gas for vehicles, and particularly in trucks and buses. But there are other areas where we are finding tremendous cost savings as well as environmental savings.

In the state of Pennsylvania, there are nine coal burning electricity plants in need of upgrading to meet new EPA standards. These nine plants produced collectively around 1500 megawatts. After a thorough cost evaluation, it was deemed more efficient and safer to convert these to natural gas fired electricity plants. These same nine plants are expected to produce over 11,700 megawatts.

We are seeing many manufacturing plants convert to natural gas also. Throughout the nation, major manufacturing plants are converting to natural gas-fired plants, reducing the fixed cost by 15% to 25%.

The most important consideration, however, may be that, in the near future, we will be exporting large quantities of liquid natural gas. As I explained earlier, the difference in the price of natural gas here and in Europe is approximately 8 dollars per mBTU. Most of Europe is currently dependent upon Russian imports to meet their natural gas needs. We have seen this most recently in the news with regard to Ukraine being 100% dependent on Russian energy. Being able to export natural gas to Europe could open up a huge opportunity for our natural gas industry, as well as offering political leverage, too.

We now have the ability to convert our natural gas to liquid natural gas, which makes exporting feasible. By converting it to liquid natural gas, its volume is reduced 600 to 1, therefore making it cost-effective. Boone Pickens projects that by the end of 2015 to early 2016, we will be exporting natural gas. The challenge in this area is building the conversion plants, as well as the infrastructure of pipelines to deliver the raw product. Another barrier is to develop a tanker in which to carry liquid natural gas. All of these challenges are being addressed, and the first liquid natural gas should begin shipping out of Louisiana in late 2015.

As I'm sure you can tell, I'm very excited about the prospects of energy and particularly natural gas. I do not believe this is a short-term investment. I believe the natural gas sector and particularly pipelines and infrastructure will be the next great growth area here in the United States.

There are a number of ways to invest in this sector. One way that I would recommend would be the use of closed-end funds or ETFs. Here are a few closed-end funds that concentrate on the infrastructure that are currently trading at discounts to their net asset value: FIF (NYSE:FIF), KMF (NYSE:KMF), EMO (NYSE:EMO), NML (NYSEMKT:NML), GMZ (NYSE:GMZ), and TTP (NYSE:TTP). As with any equity position, you will have volatility. Remember that these investments should be viewed as long-term. I do think you will be rewarded well for your patience.

Source: Natural Gas: The Next Great Growth Area