Natural gas prices have had a rough couple of years seeing dramatic declines in early 2010 and again over the last six months. The price of natural gas is now less than half the price that it was in January of 2010.
Whether natural gas has further to fall or is finally finding a bottom, a quick recovery is most likely not on the horizon. The discovery of large fields and hydraulic fracturing has substantially increased supply in the United States. Of course, environmental groups and the government could slow the pace of exploration; it is unlikely that will spell a swift recovery in natural gas unless major environmental issues are discovered with hydraulic fracturing. There are plenty of opinions on both sides as to whether hydraulic fracturing is environmentally safe, so I am not going to argue that point here. However, if you are interested in further information on hydraulic fracturing the United States Environmental Protection Agency and Chesapeake Energy Corporation (CHK) both have informative websites.
If natural gas prices remain low and less volatile, several industries stand to benefit either through lower expenses or increased revenue. Companies focused on natural gas as a transportation fuel such as Clean Energy Fuels Corp. (CLNE) should see demand growth from consumers, businesses and potentially growth through government policy. CLNE is a provider of compressed natural gas (CMG) and liquefied natural gas (LNG) for transportation through a network of fueling stations in the United States and Canada. CLNE also owns and operates two liquefied natural gas plants, a landfill gas facility and is a provider of natural gas vehicle conversions. CLNE is not yet profitable, but its adjusted EBITDA is in positive territory. CLNE also has some major financial backers including T. Boone Pickens and Chesapeake Energy Corporation. CLNE recently announced that investors exercised warrants, which added a $150 million investment to expand the natural gas fueling infrastructure in North America. Further details on this investment can be found here.
Other companies involved in natural gas transportation include Westport Innovations, Inc. (WPRT), Fuel Systems Solutions (FSYS) and for a higher risk security, one can look at Omnitek Engineering Corp. (OMTK.OB). WPRT develops technology and produces engines that primarily run on natural gas. The technology and products of WPRT serve the light-duty, medium-duty, heavy-duty and high horsepower markets. In addition, WPRT has a joint venture with Cummins, Inc. (CMI) to serve the medium- to heavy-duty engine market. More information on Cummins Westport Inc. can be found here. FSYS designs, manufacturers and supplies components and systems for transportation and industrial markets. Its products are designed to control the pressure and flow of fuels such as natural gas in internal combustion engines. Omnitek is a supplier of new natural gas engines and also manufactures a proprietary technology used to convert diesel engines to operate on natural gas. Omnitek is a very small company traded on the OTC Markets and had revenue of only $1.31 million for the first nine months of 2011.
Companies involved in the ownership, construction and servicing of natural gas pipelines also should be able to expand revenue through increased usage and demand. Companies like Spectra Energy Corp (SE), which is engaged in the gathering and processing, transmission and storage and distribution of natural gas in the United States, and Canada, could certainly benefit. SE boasts over 19,000 miles of natural gas pipelines including Texas Eastern Transmission which extends 9,200 miles and connects Texas, and the Gulf Coast, to key markets in the Northeast. SE also has 3,500 miles of gathering pipelines in Western Canada and a 50% ownership in DCP Midstream which gathers raw natural gas through 60,000 miles of pipe and owns or operates 60 processing plants. SE is also the owner of the second largest natural gas utility in Canada. At the end of last year, American Electric Power (AEP), Chesapeake Energy Corporation and SE announced an agreement to expand the Texas Eastern pipeline to connect Ohio’s Utica and Marcellus shale gas fields to key markets attached to the pipeline.
There are of course many pipeline operators and master limited partnerships that could be worth a look including Kinder Morgan, Inc. (KMI), which agreed to acquire El Paso Corporation (EP) for approximately $21 billion. The deal will give KMI 67,000 miles of gas lines and will make it the largest pipeline operator in the United States.
Companies that build and support pipelines like Shawcor Ltd (SAWLF.PK) and Willbros Group Inc. (WG) should also benefit from increased demand. Shawcor is certainly not a household name, but provides key services and products to the pipeline and pipe services markets through several business units. Shawcor provides services such as pipe coating and girth-weld inspection. The company’s products include flexible composite pipe and various products and systems used for pipeline corrosion and thermal protection. The company has seen good growth in North America for its pipeline and pipe services segment which account for 54% of sales during the first nine month of 2011. The stock of Willbros Group has struggled over the last year as heavy debt loads and continued losses have taken their toll. However, the company made it a point to reduce debt in 2011 and has been successful. WG has accomplished this through the use of excess cash, divestiture of non-strategic business units and the use of proceeds from a contract dispute with TransCanada Pipelines Limited, a subsidiary of TransCanada Corporation (TRP). As of October 31, WG had paid down over $113 million which left a principal balance of $185.9 million on its outstanding term loan.
In addition to transportation and pipelines, companies that use natural gas in the production of end products such as agricultural nutrient and feed producers Intrepid Potash, Inc. (IPI) and The Mosaic Company (MOS) and chemical producers FMC Corporation (FMC) and The Dow Chemical Company (DOW) should be able to increase their bottom line. These companies use natural gas both as a feedstock in the manufacturing process and to power the plants that produce their end products. Low natural gas prices should allow these companies to lower the overall production cost and increase margins.
Of course none of these companies should be considered based only on low natural gas prices alone and thorough research on an individual company basis would be required. The companies mentioned should only be considered starting points within particular industries. Some companies mentioned in this article are very small and carry a high degree of risk. Each investor should perform his or her own thorough due diligence and make an individual decision as to whether an investment in a particular company is suitable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.