Natural Gas Options

 |  Includes: CLNE, COP, CQP, GM, HMC, LNG
by: Little Apple

When I talked to my mother in Midland, Texas the other day she said that one of her neighbors wanted to know some good natural gas companies to invest in. I said I would look into it because I too had noticed that the price of natural gas had gone so low that it might be a really good investment. But even though my family has been in oil and gas, I know nothing about it. So if you are an expert on the subject this article might seem elementary to you.

We moved to Midland from Denver when I was thirteen. My mother said "We are going to this little town out in the desert". My father was thrilled. He became the president of an engineering company which dealt mainly in natural gas and other chemicals. He used to try to explain to me how important natural gas was, and all of the uses that it had and would have in the future. He talked about compressed natural gas, and liquid natural gas and how there were all these different processes. But I was a teenager with more important things to think about. Hindsight!

So when I was researching different natural gas companies, it occurred to me that I was going about this backwards. Invest in natural gas, yes, but while it is so cheap, why not research more ways of using it, and invest in those companies.

One such stock is Honda (NYSE:HMC). Currently it has a natural gas Civic which was named "Green Car of the Year for 2012" by Green Car Journal. And the new clean running Civic is "Made in America". But even though natural gas is much cheaper and cleaner than gasoline, the car has come up against some opposition. The biggest complaints are the lack of service stations, and the cost of the car, which is about $10,000 more than a regular Civic. But the cost may not be an issue much longer:

The price for a natural gas vehicle could go down significantly if Congress approves a tax credit proposed in the Obama administration's 2013 budget. The administration has proposed replacing the current $7,500 electric vehicle tax credit with an advanced technology vehicle credit of up to $10,000. The credits would go to manufacturers in an effort to encourage lower prices and spur demand.

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And now two more major automobile companies are planning to come out with natural gas trucks this summer:

High pump prices are encouraging General Motors (NYSE:GM) and Chrysler to roll out pickups that run on natural gas, which is plentiful and cheap in the U.S..

As far as service stations, there are CNG (compressed natural gas) re-fueling stations popping up all over the country right now. The price per "gallon" in Oklahoma is around $1.11. And the average price in the U.S. is $1.89. It may be a little inconvenient to find stations while traveling, but think about it: would you be willing to drive across town to save up to $2 a gallon in gas right now? That's a $40 savings with a 20 gallon tank.

Chart forCheniere Energy, Inc. (<a href=

The other use for natural gas is in the trucking industry which uses millions of gallons of fuel a year. Clean Energy Fuels (NASDAQ:CLNE) plans to open service stations which will provide liquid natural gas LNG to large semi-trucks which normally run on diesel fuel. One author thinks that this stock which currently sells for around $20 a share, could go as high as $200 in the next five years:

The business that I am going to focus on is the Natural Gas Highway - the liquefied natural gas business targeting large trucks (18 wheelers) that travel on long distance routes. In connection with this business, CLNE is developing a national network of filing stations and support facilities. In 2011, this business saw a volume increase of nearly 40 percent and more and more operators of these large trucks seem to be ordering LNG vehicles.

There are some who are even proposing exporting the LNG to other countries (especially Europe and Asia) where the demand for natural gas is very high. However, even though we have the technology for that, it would still require a lot of new infrastructure:

America, on the other hand, has only two export terminals. The terminal in Kenai, Alaska, which was built in the 1960s, was idled in November of last year. [At the time, ConocoPhillips'(NYSE:COP) spokeswoman Natalie Lowman told The Associated Press the plant will be in preservation mode until spring 2012, at which time the company will re-examine the facility.]

The other is Cheniere Energy's (Partners) (NYSEMKT:CQP) Sabine Pass LNG Terminal, near the border of Texas and Louisiana. This station has 4 billion cubic feet per day of capacity.

In my research the name Cheniere Energy (NYSEMKT:LNG) and its subsidiary Cheniere Energy Partners has come up several times in articles about processing and then exporting LNG. This could change America's energy trade balance from negative to positive. Rather than the U.S. being dependent on foreign oil, we would be depended on for our natural gas. Here is one excerpt:

A couple of weeks back I spoke about why Cheniere Energy is the next natural-gas stock to own. The biggest advantage this company currently holds is its first-mover status in exporting natural gas. Currently, liquefied natural gas sells for around $16 per MmBtu in Asia, a huge premium from $2/MmBtu in the U.S.

In line with this, Cheniere will build the $10 billion export facility in the Sabine Pass, next to its import terminal. The company expects LNG exports to commence by 2015. It plans to build four LNG trains (or liquefaction facilities), each with a production capacity of 4.5 million tonnes per annum. That's equivalent to 219 billion cubic feet of natural gas being liquefied.

All of this could be a major shot in the arm for the U.S. economy. If natural gas becomes a primary fuel for automobiles and trucks, many lives will change for the better. And it can also be used for other "fuel hogs" such a ships. This would provide jobs for Americans, while helping the environment at the same time. It could bring back "The Good Old Days".

But, Cheniere Energy just posted earnings on Friday:

The Houston natural gas company reported a loss of $56.4 million, or 43 cents per share, in the three months ended March 31. It lost $39.8 million, or 60 cents per share, in the 2011 first quarter.

The company blamed its results on liquefied natural gas terminal and pipeline development expenses and lower natural gas marketing and trading expenses. The quarter included development expenses of 17 cents per shares, primarily related to the development of a new gas terminal.

Revenue fell 11 percent to $70.5 million, from $79.2 million a year ago.

And its subsidiary Cheniere Energy Partners also posted a loss on Friday:

CQP reported a net loss of $19.3 million compared with a net loss of $2.2 million for the same period in 2011. Results include development expenses for the Sabine Pass Liquefaction Project ("Liquefaction Project") of $17.9 million for the quarter ended March 31, 2012 and $7.5 million for the comparable 2011 period.

To go into each of these stocks in depth is beyond the scope of this article. But due to the future potential of exporting natural gas, I think these companies are worth the risk. This is so valuable to the future of the energy industry in the U.S. If Cheniere were to become financially unable to finish these projects, a major energy company such as Conoco would probably snap it up.

Will Clean Energy Fuels really go from $20 a share to $200? Is that really possible? I think that it is not only possible, it is probable. I am recommending Clean Energy Fuels and Cheniere Energy to my Mom's friend. At this time it is based on speculation, and there is some risk. But these look like two very lucky stocks. One way to take advantage of this potential energy boom, while lowering the risk, is through options:

Call Options Expire at close Friday, January 17, 2014
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Strike Symbol Last Chg Bid Ask Vol Open Int
3.00 CLNE140118C00003000 16.00 0.00 14.00 16.50 2 19
5.00 CLNE140118C00005000 12.20 Down 2.60 11.70 14.20 10 81
8.00 CLNE140118C00008000 13.00 0.00 8.30 10.80 1 4
10.00 CLNE140118C00010000 8.00 Down 0.50 7.60 8.60 130 229
12.00 CLNE140118C00012000 6.90 0.00 5.50 8.10 5 216
15.00 CLNE140118C00015000 5.60 Down 0.20 5.00 5.50 12 428
17.00 CLNE140118C00017000 4.30 Down 0.40 4.00 4.60 33 560
20.00 CLNE140118C00020000 3.40 Down 0.22 3.20 3.70 2 1,260
22.00 CLNE140118C00022000 3.00 Down 0.30 2.60 3.10 13 645
25.00 CLNE140118C00025000 2.30 0.00 1.75 2.60 1 412
30.00 CLNE140118C00030000 1.80 0.00 1.40 1.80 55 1,073
35.00 CLNE140118C00035000 1.15 Down 0.10 0.90 1.30 10 26
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If you are extremely bullish on Clean Energy, you could buy $35 Jan 2014 calls for around a dollar a share. If the stock is headed for $200 in five years, then it should be well over $35 in 20 months. A more conservative play would be the Jan 14 $22 calls for $3 a share. And you could do this same thing with Cheniere. Be sure to talk to your broker, because options can (and do) expire worthless. But I just can't get that $200 out of my head.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.