Natural Gas: The Alternative Clean Energy Investment

Now is the time to invest in natural gas. As an economist, I have been involved in alternative energy issues for the past 4 years. Long term, the US, and ROW (rest of world) need to move away from DITD (digging in the dirt) to produce energy. These non-DITD alternatives would be:

1) Wind power

2) Solar power

3) Geothermal

4) Bio-fuels

While I am very excited about all these energy sources, I firmly believe they are not yet ready for investors. They are all what I call FSC (first stage competitors). Remember all those cute little Internet stocks of the late 1990s? The same will happen to the overvalued solar, and bio-fuel equities, in my opinion...The problem is both political and economics, but also valuation. From the political front, the problem is the concept of public goods, and externalities. Go to this paper for a quick read about this issue.

Without a per unit tax on polluting source of energy, alternative sources of energy will never be economically viable. The problem is that only the most polluting sources of energy creation will be favored in our free market system. Starting in 2009, I believe the US will finally initiate either a cap and trade system, or per unit taxes on pollution. These new taxes/costs for polluting are coming - No other possibility exists. Read this recent article from the WSJ.

This article focuses on coal, but the same will happen for the federal gas tax - it will rise significantly. Once the cost increases (as it should) for the polluting forms of energy generation, all other alternative forms will be more viable. Still, Solar, wind and bio-fuels are not ready - the infrastructure is still not fully built, and will not be ready for at least 5-10 more years, in my opinion. There is only one possible alternative for the US - natural gas. The primary component of natural gas is methane (CH4).

The US has just as much NG as it does coal. The primary issue is simply cost factors - NG cost more the extract. A common misconception about natural gas is that we are running out, and quickly. However, this couldn't be further from the truth. Read this for more info.

The US and ROW will start to reduce the practice of using pulverized coal power plants and move to much cleaner NG plants. Also NG powered cars will rise in use with both NG cars, and fuel cell/Hydrogen powered cars increasing in use. Currently the easiest way to get free hydrogen is from methane CH4.

It is becoming clear, natural gas demand and prices will rise. Currently the energy ratio between oil and gas is 6 to 1. Meaning the energy content for a barrel of oil is 6X that of natty gas...So as of today NG is vastly under priced:

ng price = 8, so the oil equivalent would be about $50, almost half the cost of oil.

The only reason NG sells below 10 is that the US has huge cheap to get at coal reserves. But as discussed above, the current use of coal will be made more expensive due to the huge pollution issues with coal. Below is a quick recap about the current pollution of coal and auto oil based fuel:

Dirty Coal-Fired Power Plants and Air Pollution Power plants are a major source of air pollution, with coal-fired power plants spewing 59% of total U.S. sulfur dioxide pollution and 18% of total nitrogen oxides every year.4 Coal-fired power plants are also the largest polluter of toxic mercury pollution5, largest contributor of hazardous air toxics6, and release about 50% of particle pollution.7 Additionally, power plants release over 40% of total U.S. carbon dioxide emissions, a prime contributor to global warming.8 Smog and Ozone Power plants are second only to automobiles as the greatest source of NOx emissions.9 When nitrogen oxide (NOx) reacts with volatile organic compounds (VOCs) and sunlight, smog (ground level ozone) forms. Of the six major criteria air pollutants regulated by the EPA, NOx emissions have historically been the hardest to control. One of the contributing factors is that NOx emissions from huge dirty coal plants in one region can easily pollute areas hundreds of miles downwind. The American Lung Association estimates that almost half-48% or 140.5 million- of Americans live in areas with unhealthy levels of smog.10 When inhaled, smog can cause a wide range of health problems, including immediate symptoms like shortness of breath, chest pains, wheezing, and increased susceptibility to respiratory problems.11 Smog can also cause many more serious problems like increased risk of asthma attacks and lung inflammation. Recently, scientists concluded that exposure to smog can be deadly. Smog affects everyone, but is especially dangerous for children, the elderly, and those with respiratory problems.

I know this is an investment web site - be patient I am getting there! It is obvious to me that the best investments for the next 5-10 years will be natural gas related equities.

I use a DCF model for valuing equities. My top 100 equities have many NG stocks. here is my top NG picks and current value estimate:

1) Precision Drilling (PDS): 50

2) Chesapeake Energy (CHK): 60

3) Pengrowth Energy Trust (PGH): 27

4) Provident Energy Trust (PVX): 15

5) Pride International (PDE): 30

6) Bronco Drilling (BRNC): 22

7) Helmerich & Payne (HP): 50

8) Swift Energy (SFY): 50

9) Pioneer Drilling (PDC): 40

10) EnCana Corporation (ECA): 70

11) Nabors Industries (NBR): 40

12) Devon Energy (DVN): 120

Comments

[tessant:]

has anyone looked into CLNE? its backed by boone pickens and is trying to build a nationwide chain of natural gas stations. its discussed on my website if anyone wants to check it out - click link on side for growthportfolio...

scott

2008 Feb 24 03:57 PM

[Thomas Mari...:]

Is there any reason why you aren't considering companies like Microgy, Intrepid and others developing renewable natural gas infrastructure and supplies? After digestion, the effluent is a source of renewable fertilizer as well, not all that different to what COIN has started doing recently with food wastes.

There are a handful of companies doing such work today that I have been following for quite some time.

The first 4 are clearly focused on biogas derived natural gas alternatives and the last 2* have the ability, IMO, to move in that direction from the more straightforward generation of renewable electricity, and have a large base of farm scale installations.

Microgy (EPG)
Intrepid (IESV.OB)
Phase 3 (private)
BES Bio Energy Solutions (Private)
GHD* (private)
RCM* (private)

All bear careful watching, as I think that the European biogas model is starting at the grassroots level today here in the US.

2008 Feb 24 05:14 PM

[growthvalue:]

Best pick for me is SNEN.OB a natural gas stations company in China.
With there air pollution problem this company is setting up to be a monster that even Boone would enjoy.

2008 Feb 24 07:11 PM

[jimmy46:]

"The only reason NG sells below 10 is that the US has huge cheap to get at coal reserves."

Not true, the reason natural gas lags oil is because the federal government set the price at 25 cents/1000 cf until the late 1970's.

All the methane produced was a by product of oil production.

Shortages in the late 70's led to the lifting of the price freeze and finally people started looking for methane.
For the first time in the US.

Burning methane to make electricity is stupid and sometime in the future we will regret it.

2008 Feb 24 07:30 PM

[viv:]

What about GGR, Speculative Natural Gas play.

2008 Feb 25 08:58 AM

[Global Warm...:]

You are spot on about Natural Gas. It is the bridge fuel to the future of carbon free energy. Natural Gas has the lowest amount of carbon for each unit of energy. It is cleaner than oil or coal. There is still abundant amounts available in this country. We have a robust distribution system for delivering Natural Gas already in place. We should be substituting Natural Gas for gasoline and diesel for our transportation by developing new hybrid power systems that run on Natural Gas (Gas turbine / electric generator).

In addition to Natural Gas producers, I like companies like Kinder Morgan Partners (KMP) that distribute Natural Gas.

2008 Feb 25 04:11 PM

[smoke:]

First we need to find some patriotes to help get this country back from the no- brains in DC. Then we can tackle some of these problems. With out patriots ,any thing you do will be highjacked by evil business men and the sold out congress and Senate.Go figure.

2008 Feb 29 11:40 AM

[Walter:]

Check out China Natural Gas (CHNG). This one is a no brainer.

2008 Mar 02 12:33 AM

[Ames Tiedeman:]

You get Gas and Oil with PGH and PVX.

2008 Mar 13 05:47 PM

[ripskii:]

As previously noted NG is clearly the bridge fuel to the future. One reason it sells well below its energy equivalent to oil is convenience of use. Most of our imported oil is for transportation use, so we must learn how to adapt to NG use. Honda has built the GX version of the Civic and now made it generally available. The downside is lack of NG refueling stations and short range due to the need for the high pressure storage tank. Home refueling is possible via a compressor connected to the home NG line and this makes it a good choice for commuter use. I see more and more NG fueled buses and trucks on the road lately, so Boone Pickens has it right for the near term. We need the political will to push this solution forward, something lacking now.

2008 Apr 01 08:08 PM

[casainc:]

The only problem with Compressed Natural Gas is the EPA and states have regulated the use until the consumer cannot use it. As usual the government involvement has turned a good thing into a train wreck. Converting vehicles is cheap and easy but thanks to the EPA and other government entities - you would have to be a millionaire to afford the cost to convert. In many states you cannot even get CNG. Just something to think on before you get too excited.

2008 Apr 14 08:16 PM

[BRKholder:]

Would like to know how you come up with positive current values for companies like CHK and PDE if you are using a DCF model. Some of these companies have negative free cash flow.

Please explain. Thanks.

2008 May 26 07:16 PM

[jarco:]

The key is allocating the resources where most efficient. Natural gas pipelines already exist to satisfy most winter home heating requirerments. NG for power plants should be minimized. The challange is to maximize converting residential users from oil to NG. Oil's dirty and expensive to transport and should be directed towards autos where refined product is pipelined. Nuclear obvioulsy needs to be controlled thus power plants. Get rid of coal burning; conversion to gas and/or liquids exclusively.

Only the Fed can make this happen. Unfortunately, our elected officials have neither the fortitude or wisdom


On Apr 14 08:16 PM casainc wrote:

> The only problem with Compressed Natural Gas is the EPA and states
> have regulated the use until the consumer cannot use it. As usual
> the government involvement has turned a good thing into a train wreck.
> Converting vehicles is cheap and easy but thanks to the EPA and other
> government entities - you would have to be a millionaire to afford
> the cost to convert. In many states you cannot even get CNG. Just
> something to think on before you get too excited.

2008 Jun 14 11:19 AM

[jarco:]

Unfortunately, KPM is not an IRA holding candidate. The tax free feature is eliminated and must be passed through. Otherwise, I agree but prefer EP fro both entry price (about 20) and growth potential


On Feb 25 04:11 PM analyst wrote:

> You are spot on about Natural Gas. It is the bridge fuel to the future
> of carbon free energy. Natural Gas has the lowest amount of carbon
> for each unit of energy. It is cleaner than oil or coal. There is
> still abundant amounts available in this country. We have a robust
> distribution system for delivering Natural Gas already in place.
> We should be substituting Natural Gas for gasoline and diesel for
> our transportation by developing new hybrid power systems that run
> on Natural Gas (Gas turbine / electric generator).
>
> In addition to Natural Gas producers, I like companies like Kinder
> Morgan Partners (KMP) that distribute Natural Gas.

2008 Jun 14 11:25 AM

[User 222098:]

Scott - yes, CLNE has possibilities, has gone up about 50 % recently. Pickens owns about 65% of it and I like his ideas. I expect that it will be some time before CLNE is profitable but I wish it well.
WPK


On Feb 24 03:57 PM tessant wrote:

> has anyone looked into CLNE? its backed by boone pickens and is trying
> to build a nationwide chain of natural gas stations. its discussed
> on my website if anyone wants to check it out - click link on side
> for growthportfolio...
>
> scott

2008 Aug 28 12:47 PM