When I was a child, one summer we went to see my Aunt Janet who owned a horse ranch in Colorado. Once, we made a day trip to that well known gold mining/frontier boomtown of Cripple Creek. You might know it from Kerouac's On the Road. Cripple Creek has changed a great deal since the mid-seventies. At the time, I remember some guy had set up a big wooden horse trough so that it was about waist level. He had the long, matted beard, turned-up hat, and a real six-shooter. He even smelled. And this was the best part: He would rent his gold mining kits to you.
You could do "real-time" gold panning in his giant wooden bath tub. Furthermore, there was "guaranteed" to be gold in there! Cool! Knowing this to be a fantastic idea, I went to finagle the $3 rental fee from my dad. I was going to find a nugget if it took all day, by gum. My dad listened to me for a bit as I explained that for just a few dollars we could strike it rich in gold!
My dear old dad, sire and paterfamilias, cuffed me swiftly on the back of the head and said something like, "No, if there was gold in there that guy wouldn't be renting pans for you to find it."
There's a Life Lesson For You
There is an old Wall Street adage that says, "To make a fortune, you don't want to mine the gold, you just want to end up with the gold." Historians estimate that only one in twenty miners left the goldfields with more money than his original stake. Those who did strike gold started a boom economy that brought financial success to those who supplied them.
Often times, to make money you have to ignore the miners and buy those that mine the miners. It's known in the trade as a "pick and shovel" trade. The classic example is Levi Strauss who made his fortune selling picks, shovels, pans, and durable pants to the California gold miners who showed up in the boom of 1849, giving us the name of the San Francisco football team.
Natural Gas Boom
Right now, the United States is undergoing a natural gas boom. The U.S. now has enough gas reserves to last more than a century. I'm sure you've read the stories about record low unemployment in places like North Dakota, as producers rush in to profit from this newfound energy source.
In fact, we have so much of this resource that there have been known cases where companies are giving it away because of lack of storage. Take a look at the chart showing the NYMEX price for natural gas. Prices are below $2 per mmBTU - that's the lowest they've been in a decade.
But the companies that have the most reserves, like the miners from our example above, aren't the ones who are profiting. Just take a look at Chesapeake Energy (NYSE:CHK).
It's hard to make money when what you sell is in abundance while your costs are fixed. This is the chart for Westport Innovations Inc (NASDAQ:WPRT).
They lost $60 million last year, but grew revenue more than 80%. You see, it makes low-emission engines and fuel systems for light-, medium- and heavy-duty trucks that use natural gas as an energy source. It is estimated that the average long-haul truck that drives 120,000 miles per year at 5 miles per gallon could save $46,000 a year on fuel costs by switching over from diesel to natural gas. This equates to billions of dollars in savings each year. When you realize that garbage trucks and cement trucks get two miles to the gallon ... you can see where it would be worth it to switch over.
It might be too late (or too early) to buy into Westport Innovations, but there are other ways to play cheap and abundant natural gas. There are companies that build out infrastructure like pipelines and liquefied natural gas terminals ... There are also companies that filter the vast amounts of water that fracking wells consume ... These are the "pick and shovel" companies that will make vast fortunes while the "miners" do the work.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.