Smells Good: The Case for Natural Gas 17 comments
-
Font Size:
-
Print
- TweetThis
So much attention is being paid to the high cost of crude oil these days, is natural gas being overlooked from an investment perspective? As we all know, natural gas is the dominant heating fuel in a majority of US homes. Natural gas is a fuel for electrical power generation and an important feedstock for the fertilizer industry. Increasingly it is being used as a transportation fuel.
The following natural gas data was obtained from the EIA website:
2002 2006
Marketed Production 19,884,780 19,381,895 [MCF]
Producing Wells 387,772 448,641
Residential Prices $7.89 $13.75 (thousand cubic feet)
Certainly hurricanes Katrina and Rita impacted natural gas production, distribution, and prices for the periods shown. That said, the trend is clear: US nat. gas prices are rising and roughly 60,000 more wells were needed in 2006 to produce a slightly lower amount of nat gas as in 2002.
As I write this article, oil is trading at $128/barrel and natural gas is trading at $11.79 per thousand cubic feet, for a price ratio of 10.9 oil/gas. On an energy basis, according to the EIA website:
1 barrel of crude oil (42 gallons) = 5,800,000 BTU
1 cubic foot natural gas = 1,025 BTU
So, comparing apples to apples on a BTU energy basis, the energy ratio would be 5,800,000/1,024,000 = 5.6 oil/gas [BTU]. The conclusion here is that, based purely on energy equivalency, natural gas is a bargain at today's prices. One could therefore make a decent bullish argument that natural gas prices need to rise to keep up with oil on a purely energy equivalent basis.
However, it is important to understand that natural gas has limited worldwide transportation. While the market for liquid natural gas [LNG] is growing, it is not close to being transported worldwide on an equal basis with crude oil. That is, natural gas pipelines are predominantly "local". (The US is lagging on LNG terminal licensing and construction, but once enough people get cold in winter or pay too much, the US will be dragged into the 21st century.) Gasoline is refined from crude oil, not natural gas. These two factors are largely responsible for the "energy discount" natural gas trades at versus crude oil.
Will this energy discount continue in the future? Although worldwide pricing for natural gas will surely continue to show considerable variation among localities, worldwide nat gas price differentials should narrow as LNG terminals and transportation vessels increase in number and volume. Transportion and processing costs will be tacked on, but in general expect prices around the globe to consolidate more closely.
Readers of my previous articles know that I am a firm believer in the peak oil theory, strongly suggest the US develop a comprehensive energy policy to confront peak oil, and have published a suggested energy policy.
Part of this proposed energy policy proposes that natural gas increasingly be used in place of crude oil based gasoline for transportation solutions. I have identified the nat gas powered Honda Civic GX as an alternative, and people like T. Boone Pickens are working to develop wind energy in the great plains in order to offload the natural gas being used for electrical generation so that it can be used for transportation. Picken's company, Clean Energy Fuels (CLNE), is currently focusing on natural gas powered fleets. However, there is nothing to say natural gas cannot be used in mass transit or individual automobiles like the Honda GX. There is certainly a need for some infrastructure, however as the price of oil continues to rise, these obstacles to natural gas will slowly but surely be negated.
Long term, there will be a large and growing global market demand for natural gas to replace refined crude oil as the price of crude oil continues its dramatic climb due to worldwide supply/demand fundamentals. Oil is increasingly hard to find and more costly to produce than in years past. In many cases, natural gas is a much cleaner burning fuel as well. Also, expect the US dollar to continue to weaken due to two primary causes:
1) huge fiscal deficits due to the irresponsible tax and spend policies of the last 8 years.
2) as Ross Perot would say, the large sucking sound of $700 billion a year (at current oil prices, and they are rising...) leaving the US to find a home in the Middle East and Russia to pay for oil due to the lack of an US energy policy.
I bring this up because natural gas, as a worldwide commodity, will in the years ahead provide protection against a devalued US currency.
So, how do we play this from an investment perspective? Well, the largest producer of natural gas in the US is ConocoPhillips (COP). In hindsight, COP's takeover of Burlington Resources was CEO Mulva's masterpiece. Natural gas pricing and volumes should power ConocoPhilips for years to come. COP is cheap with a PE=11 and a dividend yield of over 2%.
However, many times the smaller players show the greatest increase in production volumes, earnings, and stock price appreciation. My biggest regret is not acting on Continental Resources (CLR) earlier! Just as I was looking at the stock at $30 it went to $40. Just as I convinced myself to get in at $40, it went to $50 and then $60. A double while I pondered over the financials! Oh well, my point is, there are others, just do some homework.
Meanwhile, check out these natural gas investment ideas to see if they have a place in your portfolio:
Natural Gas Specific:
- UNG (Natural Gas Fund ETF)
- Apache Corporation (APA)
- Chesapeake Energy (CHK)
- Devon Energy (DVN)
- Fidelity Select Natural Gas [FSNGX]
Energy Services:
- IEZ (iShares Dow Jones US Oil Equipment Index ETF)
- Schlumberger(SLB)
- Nabors Industries (NBR)
- Fidelity Select Energy Services [FSESX]
A small cap kicker in the nat. gas arena might be Capstone Turbine (CPST).
Disclosures: The author owns SLB, NBR, FSNGX, and FSESX.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 17 comments:
elliot: i knew when i wrote the $700 billion comment that someone would point out the technically incorrect source of our imports. that said, my point was that oil is a global market and saudia arabia and russia are the two largest producers. the lack of a comprehensive US energy policy has led to huge inefficiencies, higher US oil consumption than necessary, and therefore higher prices - all of which have greatly benefited SA and russia. the falling dollar due to recent US fiscal policies have also played right into their hands.
i realize that LNG has not caught on in the US, which i alluded to in the article. the point i was trying to make is that "IF" the US had a comprehensive energy policy, we would be (or at least SHOULD be) encouraging the greater use of natural gas in the transportation sector, granting licenses to construct LNG plants, and be building the infrastructure for greater use of LNG sourced nat gas. the magnitude of the energy crisis facing the US due to crude oil is such that we will need ALL alternate sources of energy - natural gas is a "natural". that said, if congress's questioning of the oil execs the other day was any indication...i won't hold my breath for a sane energy policy any time soon....
1. Over 5 times cheaper per BTU
2. Much cleaner for the environment, thus much more likely to
get favorable legislation enacted in any energy policy
3. Redirects 700 billion dollars a year away from often
unfriendly foreign governments
you also have the basic fact that over the next 20 years or so, global gas production, and thus LNG trade, is going to be growing briskly while net exports of oil are going to be accelerating a downtrend already in place! Peak gas is projected to be around 2030 while peak oil is happening now and, more importantly, peak oil exports is probably history already. Just look at a chart of LNG trade and compare it to what net exports of oil have done over the last few years. One is rolling over into a decline per the ELM (Export Land Model) while the other is climbing sharply to a peak decades away.
Historically, there has always been a tight correlation between oil price and natural gas price because of the rampant interchangability between the two in industry. When gas lags as far behind oil is it is presently doing, there is always a sharp slingshot move in gas to catch up with what oil is doing, which usually overshoots oil briefly. This seems to happens every 3 years or so, and if it happens again, it would take the price of gas to over $25.
In addition to the usual industrial switchover activity from crude to NG, you are probably going to have a lot of transportation switchover this cycle as well (if Boone Pickens has his way, that is).
If the Clean Energy model catches on, we could see an unprecedented megacycle in NG versus crude.
Add in millions of nat. gas guzzlers also known as residential housing, when that puppy finally starts to eat, Nat. gas will again be in short supply.
thinking/pedriven: i like APC and Petrohawk too!
paultaut: not familiar with PGH, sorry. i will have a look later today.
Pacha: while i agree that both parties are responsible for a lack of an energy policy, in the article i was referring to recent fiscal policies: the Bush administration's huge fiscal deficits (he inherited a surplus), the lack of oversight on the ratings agencies fraudulent AAA rating of sub-prime debt, the Federal Reserve cutting interest rates in the face of huge inflation (inflation numbers which are fraudulently massaged by our government), and the Fed taking over a private investment firm like Bear Stearns, are all factors in the greater than 50% (!) devaluation of the US dollar during Bush's 8 years. this of course, has a direct impact on the price of oil, it being priced the world over in US dollars. for a country that uses 25% of the world's oil and imports 60% of that, it's a disastrous policy. yet, still, we have no comprehensive nergy policy! as i have said before, the Bush administration's fiscal policies have caused the world's reserve currency to swith: from the US dollar, to a barrel of oil. it's a disaster. there is nothing "conservative" about the Bush administration - they are the most RADICAL government in the history of the US. our standard of living will never be the same IMHO.
The lag in LNG facilities is greatly exaggerated between DOE and corporate PR and isn't much of a factor in LNG inports lagging. LNG imports are going to be longer coming than projected. The delays are not to do with licensing or NIMBY, but the incoherent incompetence of the last 7.5 years.
In 2003 there were four LNG teminal locations, Louisiana, Elba Island, GA, Cove Point, Md. and Everett, MA. There were about 40 proposals for new or expanded facilities.
FERC has approved 22 projects, including Broadwater, Eleven more have been by other authority, e.g. Coast Guard, and approved There are other proposals at various stages, including approval by the Mexican or Canadian governments. Of the 22 approved terminals, five are in Louisiana and 8 are in Texas.
The propaganda has been that the approvals are too difficult. The reality is the opposite. By forced approval of so many competing projects, FERC the competition between applicants complicated everything.
In the meantime, Excelerate Energy has quietly started operations of the Northeast and Gulf LNG gateways, buoy-based systems. Elba Island II was completed, doubling capacity of the El Paso Georgia Facility. Work is underway on Elba III, which will double it again. Important note. All capacity including Elba III is under contract.
It's always been anticipated the 60 percent of future import needs would be handled by the four 2003 facilities. People forget that Cove Point and Elba Island were shuttered for two decades and a LNG fleet scrapped. With planned expansion already approved at the big four along with the Boston and Northeast Gateways we're further along than people think.
NG prices through 2000 were not high enough to justify LNG expansion. The companies that might have pushed for long term LNG expansion in spite of prices, were going belly up or close to it in 2001 and 2002.
Some terminal needs need to be addressed, especially in areas affected by bottlenecks. The West Coast, which has trouble getting gas, needs two, possibly three terminals. Those three might include a shared Mexican terminal. There are still Northeast needs, but some of the approved terminals deserve to fail. There are plans for two Bahama terminals which would feed Florida through an undersea pipeline.
Delays? Consider the Ingleside and Gregory projects for Corpus Christi announced five years ago. Construction started and is suspended indefinitely. Why? Lack of available LNG imports.
Last year, Everett rang mostly not far from capacity, with 52+ offloads. Gateway deliveries are difference in that gasifying is done with shipboard equipment.
This is a case where both parties can't be blamed. The need arose in the early months of Bush's first term for coherent planning - as a national security issue. Instead, we stood by as China, Japan, India and other nations bought reserves and locked in production. As an example, Contract gas in Japan sells for 9.68. What they're buying to cover shortfalls costs more than $16.
The world market is coming and when it does, we will likely see peak shaving prices. It's going to be painful. EIA/DOE generates some useful statistics and is not totally useless. But there projections since 2001 are not so much projections as hope that something will happen. Their time and flow charts are unconnected to reality.
In government, all policy is political (in itself not always a bad thing) and on most issues, lack of policy means that no policy is the policy. A confused, incomprehensible energy plan is the current policy. There were apparently energy decisions made at the White House, but we don't know who was there so we don't even know why important factual assessments were not represented.
Not directly related, why are we working so hard at alienating governments in Canada, Mexico and Venezuela which we need. Chavez is not a good actor, but we've dealt with worse.
LNG supplies. The first thing you need is a reliable supplier, means of shipping, and a place to offload. To much supply has been locked up. Reliable suppy includes national politics, e.g. Nigeria. In order to ship reliably and justify the gasification trains, 20 year contracts are needed. It's possible to build ship that compress and gasify, but there's a snag there.
Korean shipbuilders -- Hyundai, Samsung, Dae Woo and others -- have 80 percent of the LNG carrier construction. Japan, once the leader, is second. These yards have 100 Billion dollar backlogs, much of it on LNG carriers, and a new LNG carrier built at this stage of backlogs is probably three to four years off. Costs are going up. (The Chinese are trying to get into this businss, but have completedly only one LNG tanker. It's a tough build).
We have very little in the ship queue. Qatar is building a fleet to handle its LNG exports. But another side of this is very long term contracts from India, China and Japan. Europe's needs can be met with far fewer ton miles. It's not that we have no contracts. It's that we have no real idea of what we doing.
In government, it is a choice to have no policy, so that no policy becomes the policy. When incomprehensible, incoherent and incompetent policy is the no-policy policy, the result is negative policy.
--
On oil, we've been propagandized to believe our problems would be solved -- energy independence would solve it all - if we could just drill Anwar or Hawaii or Miami Beach. The problem with that scenario is that is the same lack of policy we've had. Oil from the United States will be sold at the market rate, not necessarily to us. I'm not opposed to drilling, just the propaganda that we can be energy independent without major adjustments to lower our need for oil in maintaining basic economic output.
ALL analysis I've seen on Anwar (just as an example) assumes the price o f Oil will continue to rise and that part of the benefit to the U.S. will come from being charged much more, i.e. the most significant element is the economic benefit reaped from the higher prices within the United States. I don't have to take sides to understand that results of these projects is mostly to line the pockets of the few.
---
Energy independence. Gasoline is prohibitively expense in Europe but people drive -- and on good roads at high speeds sometimes. But the French economy has a 2 percent reliance on foreign oil (all it uses). In 1973, the OPEC boycott forced France to reconsider its planned high speed rail. The entire planned Turbo-liners was scrapped for electric power supplied from Atomic plants. Industries were given direct incentives, not to produce greener products, but to get large uses of energy to become more efficient. Public transit, not just buses, is found in small and medium-sized cities. The result is that France is largely free of reliance on foreign oil. Netherlands is much the same and others are moving further that way. Trains are fast and cheap.
Hydrogen or hybrid or NG cars will be made. but they can't be just more of the same. It isn't hurting me, but the filubustering and killing of a national health plan didn't solve anything.
But if we're serious on energy, we need to become less tied to cars for daily use. A comprehensive energy plan would include recognition of area distances. Commuter rail in the NYCarea carries an enormous amount of traffic. Commuters make daily round auto trips of 5-30 miles.Those are trips all electric cars can make without difficulty. Small electric cars can be charged easily at night at home when load is typically light. Parking Decks would be ideal for Solar panel arrays recharge batteries -- and cost would be reasonable because for a good part of the year, it will be providing power during peak shaving periods.
We probably aren't ready for Bikes or scooters en masse, but the Haarlem station in Netherlands typically has more than 2000 bikes in the bike lot. My 69 year old friend is in marvelous shape, never driven in his life, but biked to work and still bikes daily. Major streets all have bike lanes in both Directions. It's part of the system. Solutions can be tailored to regions, just so it's not another excuse for pork barrel. But why can't we have more bike lanes and even cart lanes for something little different from golf carts for train commuters.
Solar power is considered non-competetive, but the gap is narrowing. There are areas where solar power would have a significant cost advantage over peak shaving prices.
And before we import too much more oil and NG, we ought to be looking very closely at low cost, low tech ways to lower demand. Better windows, better SEER, etc. Require new home builders to install high SEER units instead of builder specials.
There are many areas where micro policy could make a major difference in macro policy. Rebuilding a national passenger rail system with dedicated right of way would be a major step forward. Accelerate the speech of the trains to 225 mph (current technology) average at modest prices would be a good start. The first thing to do is to start dealing with the mess we've being left.
It's true to some degree that some of these problems are old, but the cost of gasoline, the cost of Home heating oil, the cost of electricity -- far too many things have quadrupled in price under Bush. Oil was selling for $20 in the late 90s. Bush didn't inherit bad policy. He created most of this all on his own(and administration).
Wars and free markets do not co-exist. When Bush decided to invade Iraq, the result was an accumulating hangover. Just as the only certainties in life are taxes and death, the certainties of war are higher taxes and inflation.
A moderate amount of national debt is not necessarily a bad thing in economic terms. A rapid rise in national debt --- and a deficit are a tax as sure as anything called a tax. Inflation has been happening, but hidden between Chinese exports and Chinese undervaluation of its currency. We're seeing the earlier stages of inflation. Industrial policy is being created. States such as Michigan have watched helplessly as their military vehicle factories lose contracts to help lock in the Republican vote in states like South Carolina.
I'm retired, heavily invested with a lot of gas stock, and if there is one enemy of people like me, it is a government that decides to change everything -- and the total inconstancy between the two parties. I'm a died in the wool independent, but all conservative meant to me was to go forward a bit slower. I don't think I can abide another phony "conservative." In 45 years of investing, the Democrats have reliably been better for me, modest taxes, lower deficits and heathier economies. I can find only one Democratic recession since the Beginning of Eisehower's first term. That was Carter and not to excuse him, that was part of wringing out all the distortions from Nixon.
I travel to europe 3-5 times a year and all I can see is the cost of the Bushonomics. Everything that once cost me 89 cents there, now costs me 1.60 due to Bush's attack on the dollar.
But back to NG, the owners of significant domestic reserves and production will be sitting very pretty as long as we have the current policy. Effecting a major change in that policy would take 3-5 years to be really felt. One thing we need to think about is $18 NG .
Oil prices are not entirely rational right, but they're becoming more so.
Natural gas is about where it should be. Enough to encourage exploration and produce NG that in other circumstances that would not be not economic.
I've been long in KCS/HWK for a long time 1998, since KCS started collapsing and technical bankrupting. My cost basis in HK is trivial and I own a fair sized chunk. I jumped into WMB for $1.40 a share when it looked set to die. Gas has been really good to me and I think it's not through being good to me.
On cars, alternative fuels (other than ethanol as currently made) s will lessen our problem, but they only become part of the solution if we develop alternatives to cars on a continuing basis.
We're not France, but you can go most places by train for less, cut your travel time by nearly 2/3rds and not bankrupt yourself in the process. We've done this and done trips in three days (using a rental at out base point) that would require five days by car.
We used to run the best long distance trains in the world. Now one side wants to eliminate Amtrak instead of fixing it. They should run Amtrak like the Alaska Railroad. The government pays for the roadbed, the trains, a lot of maintence etc. Amtrak fails because it can't afford to get better.
BOTH DEMS and REPUBS SUCK
Obama is a socialist! McCain is half a socialist
You are just a kid so you only have a limited view of history. Wait amigo. You will see.
quotes.ino.com/chart/?...
If you want to talk about socialism, what do you think of an administration that backs the Federal Reserve taking over a publicly traded investment firm (Bear Stearns) with tax-payer money? That said, I have to admit I probably would prefer the socialism of say Sweden, Finland, and Canada to what we have in the US today: a raping of the US treasury by the uber-wealthy while the middle class (what's left of it...) struggles to buy gas, food, and pay their car and house notes. You point to history and if you have some historical perspective yourself, you must be aware that country's fall from power when the majority ("middle class") can't make ends meet. That is the track the US is on at present.
It's amazing to me the blindness virus that political ideology can cause people to conveniently ignore facts.
Age is not the biggest factor in determining intelligence. If experience and history were factors, what can one say about Bush's second term? Apparently he learned nothing from the disastrous first 4 years.