By Steven Edwards
Natural gas prices, languishing at around $2.00 per thousand cubic feet, have dropped by half in a year, and are now at decade lows. Prices are now so low that production is being shut in. Consumers have benefited from lower heating bills, while natural gas producers like Chesapeake (CHK) have been hit with declining stock prices. The carnage has been even worse in alternative energy companies like First Solar (FSLR) or coal companies like Patriot Coal (PCX) that are trying to compete with natural gas in the production of electricity.
But there are companies which actually benefit from low natural gas prices where an investor can hope to make some money. In this article I discuss five of them: Spectra Energy (SE), Clean Energy Fuels (CLNE), Cummins, Inc. (CMI), Fuel Systems Solutions (FSYS), and Cheniere Limited Energy Partners, L.P. (CQP).
Spectra Energy: Spectra is a low-risk pure play on the drop in natural gas prices. It is a utility that owns and operates natural gas pipelines. In the muddled minds of many business commentators, it is frequently lumped in with companies like El Paso or Williams Co. that are more vertically integrated. But Spectra has an edge; it doesn't explore for or produce any natural gas; it just moves it. So, the lower the price, the more that people use natural gas, the more Spectra earns on its pipelines.
And Spectra's earnings have been increasing. Its 2011 revenues were up 14% from the previous year, and earnings per share were $1.77 vs. $1.57 in 2010. The company increased its dividend 8% to $1.12 annually, which is about a 3.6% yield at its current stock price. The company also recently increased its forecast for 2012 earnings to $1.90 per share, which was above analysts' estimates of $1.86.
In March of this year, the Federal Energy Regulatory Commission gave tentative approval to a Spectra proposal to build a somewhat controversial natural gas pipeline from the rich Pennsylvania fields through New Jersey to crowded lower Manhattan. The company also has plans to build pipelines in Texas, Louisiana and other parts of the Southeast, as well as Western Canada.
Clean Energy Fuels: Clean Energy will be familiar to viewers of CNBC, where major investor T. Boone Pickens shows up regularly to promote his plans to convert the nation's truck fleet to natural gas. And why not? The cost of natural gas is less than half of diesel per mile traveled; probably considerably less if Clean Energy had any competition. Although it makes perfect sense for trucks, especially, and even passenger cars to shift to natural gas, there is an infrastructure problem-not enough service stations that provide the fuel.
Clean Energy supplies natural gas to the few service stations that sell it (about 250 currently in the U.S., going to 400 within the next year), as well as to companies that have fleets of natural gas powered trucks, which includes large companies like Waste Management (WM) and Federal Express (FDX), whose trucks follow regular, repetitive routes. Clean Energy also provides natural gas conversions systems through its subsidiary BAF Technologies. It is partnering with Navistar International to provide customers with leased natural gas powered trucks, with engines provided by Cummins Engine. Clean Energy is not yet profitable, so this is a play for those that can tolerate risk.
Cummins Inc.: Cummins is another conservative way to play low natural gas prices. The company is already the largest supplier of natural gas-powered truck engines through its partnership with Westport Innovation (WPRT) and of course, it is a major supplier of diesel powered engines. Even if the switch to natural gas does not happen as fast as hoped, investors can be comforted that the company is reaping benefits from the currently booming North American truck market. The company reported revenues and growth of 36% in 2011 and expects another 10% revenue growth in 2012.
Cummins increased its dividend over 52% last year, and currently yields 1.4%, while its price/earnings ratio is reasonably modest at around 12.
Fuel Systems Solutions: Despite a 30 year history, Fuel Systems has been an under-the-radar stock among natural gas plays. The company supplies components that control the flow of alternative fuels like propane and natural gas in internal combustion engines. The company is positioned to benefit as natural gas becomes a major fuel used for transportation. Fuel Systems has an international presence, marketing its products in Europe, Asia and South America, as well as North America.
Fuel System is modestly profitable at present; its earnings have been lumpy from year to year and the stock price has bounced around as well. Analysts expect the company to earn over $1.00 per share in 2013, but a lot depends on the roll out of natural gas infrastructure in the U.S. This is not a stock for risk adverse investors.
Cheniere Limited Energy Partners, L.P.: Cheniere recently hit a 52 week high despite the fact that it has no reported earnings and no immediate prospect of any. Cheniere's major asset is the Sabine Pass Liquid Natural Gas terminal in Louisiana. The reason for the excitement in the stock is that the company recently received regulatory approval to build and operate liquefaction facilities for the export of domestic natural gas. While natural gas is extraordinarily cheap in the United States, that is not the case in Europe or Asia. The price of natural gas in Japan is more than 6 times the price in the U.S. Japan has no choice but to import gas, as its nuclear energy plants have been shuttered in the wake of the Fukushima disaster. Thus the profit potential is huge.
On the other hand, it will probably be four years before Cheniere ships significant quantities of gas. Four years from now, the market situation may be quite different. But the company pays a dividend of 6.4% while you wait. That dividend was paid all through the worst days of the 2008 financial crisis, when the stock price had collapsed to a small fraction of its current level, so it is probably safe.