As of right now, stock prices for natural gas companies such as Chesapeake Energy (CHK) are taking a major hit. So, while drops in price seem like a negative no matter what the case, sometimes there may just be an opportunity for gain. Is this a case where taking advantage of a drop in price is an opportunity, or should you avoid Chesapeake and other natural gas/energy at all costs for the moment? I would suggest taking a look at each company to see what they have in the works, which is exactly what I am here to do.
To begin the process of choosing a decent natural gas investment, you should first know why the prices are on a downward spiral. The primary reason why natural gas prices are on the way down is actually quite simple: supply is on the way up. One of the most basic economic principles is supply and demand. Since supply is inversely proportional to demand, as supply goes up, demand for the said product (natural gas) is on the way down due to there being more natural gas available than Americans can consume. Now, what are some of the energy companies doing to make up for this drop in stock prices and increase in supply?
One company that may be the key to more widespread usage for the excessive amount of natural gas that is available in North America is Clean Energy Fuels (CLNE). Clean Energy is just one natural gas company that is taking steps to make natural gas the new fuel for cars (both diesel and gasoline). This company has actually seen stock price rises due to its support from Chesapeake.
In the long run, the development of CNG (compressed natural gas) for vehicles will help to increase the demand and price for the energy source. Increasing the price and the demand for the source of energy will subsequently raise the price of the stock prices for natural gas companies, CNG energy companies (such as Clean Energy), and any company that has a hand in either type of company.
As of right now, the best way to raise long-term demand for natural gas is to push for CNG vehicles, and Chesapeake and Clean Energy are both part of this endeavor. I would definitely suggest having stock in both of these companies because, if gas hits $4 a gallon, you will see companies and individuals both scrambling for another source of car energy. Definitely consider purchasing stocks in both these companies, especially Clean Energy, if you are looking for a long-term return.
Another energy company that represents a bigger competitor to natural gas is Halliburton (HAL). Halliburton, at the moment is trading relatively close to what it has been for the past few months, but do not expect this trend to continue.
With a number of factors including its recent downgrading from Howard Weil, expect to see Halliburton's price decreasing over the next few months.
The biggest issue that many investors are seeing in Halliburton is the rise in gas prices. Long-term high gas prices will decimate its stock prices. Simply put, when many Americans go to the point and see $4 or higher all over the country, they will do whatever possible to reduce consumption. Everything from driving less to purchasing alternative fuels or electric vehicles will hurt stock prices for Halliburton.
Simply put, as we see Halliburton stock go down, we will see Chesapeake and Clean Energy rise. While many Americans may not turn to natural gas as their option for driving, at least some will because the population will be leaving gasoline if at all possible. Steer clear of Halliburton as a long-term investment because it simply will not be able to sustain itself with the rising gas prices and increased competition from other, more efficient, fuel types.
Schlumberger Limited (SLB) is slightly different from all of the previous companies listed in that it does not focus on the actually oil/gas that is pulled from the ground, but rather the technology that gets the oil/gas out of the ground. Expect to see more short-term gains available from Schlumberger at around times of new technology, but expect the prices to go down over the long run. The only thing that could be possibly detrimental for the company is an increase in gas prices.
We will eventually see companies like Schlumberger lose money based on the gas prices for the same reason the oil companies will; there will be no use for drilling because most will either quit driving as much as possible or, more likely, purchase an electric vehicle. At this point, with gas prices on the continuous rise, it is time for an alternative fuel to come in, and any company or investor that is fully invested in oil companies will feel the blunt of this societal change.
So, as far as energy companies go, it is a gamble right now. Not on gas versus electric, or natural gas versus gasoline, but rather a gamble on natural gas versus electric (and other alternative fuels such as air). Due to all of the new technology out there, gas will one day be a thing of the past. When gas goes through the roof at $4 a gallon, the financial effect will hit each and every person in the United States. When it happened a few years ago, there were many reports on people cutting back on everything from vacations to other amenities. I expect this to almost assuredly occur again over the summer when we see gas prices shoot beyond the $4 mark in anticipation of vacations and such.
As mentioned earlier, oil companies and their technology producers will feel the long-term brunt when many people cut back. With this knowledge, I recommend purchasing stock in any company that furthers the advancement of alternative fuels (such as Clean Energy Fuels and Chesapeake).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.