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In 2008, fossil fuels were on a major downward path. Oil prices skyrocketed to over $140 a barrel, at the same time as an economic recession took place. Companies, such as car manufacturers, started building more efficient products that use less oil. Alternative resources to fossil fuels became further cost effective. Many plastics became plant based. Oil and gas companies searched for new places to drill. Gas prices exceeded $13. The search for future, less costly, resources was on.

Recently, the situation of natural gas has flipped. Priced 80 percent cheaper since the middle of the last decade, natural gas could see much greater demand. Between 2011 and 2012, the U.S. experienced one of the mildest winters on record, leading consumers to use less gas for heating. During the Spring of this year, gas sold for less than it cost to produce. The negative margins on gas lowered the first-quarter profits of large gas producers, such as Exxon Mobil (NYSE:XOM). Since 2008, the quantity of proven U.S. gas reserves increased, at the same time as natural gas demand subsided, causing a price downfall. At current prices, natural gas could see a hike in demand due to cost effectiveness and pollution regulations.

Over the next couple years, electricity production could be a growing source of demand for gas. Natural gas, during electricity production, produces half the carbon that coal emits and does not emit the environmentally harmful elements of burning coal, such as sulfur and mercury. From being cost effective and more environmentally friendly than coal, utility companies have switched from coal to gas to run their power plants. Atlanta-based Southern Co. (NYSE:SO), the largest electricity generator in the country, now gets 47 percent of its electricity from natural gas, up from 16 percent five years ago, and is planning on doing more conversion projects in the near future. Throughout the U.S., the electricity generated by gas plants has risen more than 50 percent over the last decade, while coal generation has declined slightly.

Even before gas became so plentiful, gas-fired stations had considerable advantages. The far more environmentally friendly gas-fired stations are quick and cheap to build, costing a third the price of coal-fired ones. Unlike coal-power stations, gas-power stations can turn on and off electricity production with the flick of a switch, instead of burning the same amounts of coal throughout peak and off-peak times.

With these recent changes in the oil and gas industry, it's important to determine what energy securities to take a position in. The following are some ways of entering the energy boom.

How to Play Gas:

Buy Companies with Large Stake in Shale Fields
As demand for gas grows, production of gas will need to meet the needs of consumption. The more proven gas reserves a company controls, the longer it will meet demand and profit. A company like Chesapeake energy (NYSE:CHK), is a great example, with plenty of shale to meet demand and produce long-term growth. Chesapeake energy owns 2.2 million acres of natural gas shale fields in the United States. For the second quarter, Chesapeake energy beat analyst estimates for sales, but missed profit expectations. The company had a very low P/E ratio of 6.44 and a large net profit margin of 30.60 percent. Even with gas prices extraordinarily low, Chesapeake energy's net profit margin has more than doubled since the first quarter.

Recently, Chesapeake energy released that its total economically recoverable gas reserves have dropped due to current $2.74 per MMBTU prices. The write-downs consisted of 4.6 trillion cubic feet, a 24% drop from the previous 18.8 trillion cubic feet of economically recoverable gas reserves. BHP Billiton (NYSE:BHP), another large natural resource company, on August 3, announced a near $3 billion write-down on some of its American gas fields. From gas prices slumping around 10-year lows, many previously cost effective drilling locations have lost economic viability. A natural gas company's total economically recoverable gas reserves directly correlates with the price of gas futures; therefore Chesapeake energy will have more economically recoverable resources if prices ascend and less if prices descend. Furthermore, Chesapeake energy and BHP Billiton are strong buys if you're in favor of natural gas prices going on the rise.

If you're interested in other companies with great stakes in natural gas resources, Royal Dutch Shell (NYSE:RDS.A) might be a consideration. Shell, over the next couple years, has a major position in natural gas. Among many drilling plans, Shell is building the first floating LNG ( liquified natural gas) terminal off the coast of Australia. The project will have a capacity of 3.6 million tones a year, extracting gas through the world's largest boat. As interesting as it sounds, the floating LNG station will be a long wait, planning to start production in 2017. Expenses from drilling plans could hurt short-term shareholders, but might be a vital investment to make Shell more lucrative long term.

Short (Going Short): Coal Companies with Loads of Debt

Strict new air pollution laws, passed in the U.S. last year, will speed-up the rate of coal power plants retiring and the construction of new gas-fired power plants. At Sanford C. Bernstein, analysts believe 66 gigawatts of coal-fired electricity generation, about 6.5% of U.S. electrical capacity, will shut by 2015, all replaced by gas and renewable. Other countries with enormous shale-gas reserves, such as China and Australia, have barely begun drilling, however, have major plans to exploit natural gas resources in the near future. Australia has an estimated $200 billion worth of planned LNG (liquid natural gas) projects for the near future, aiming for the industry to triple current production to 60 million tones a year by 2020.

Coal companies with loads of debt are likely to further struggle than those with minimal quantities. Debt in a company can have a byproduct of growth, but in an industry that's traveling downward, it can have the opposite effect. James River Coal Co. (JRCC) has debt of almost 7 times market capitalization and a debt-to-equity ratio of 152.72. Its levered free cash flow (cash position after debt interest is paid off) is -$51.66 million, over half its market capitalization. During the second-quarter earnings call, James River Coal Co. announced that it had net loss of $25.8 million or -$0.74 per diluted share for the second quarter of 2012 and net loss of $41.4 million or $1.19 per diluted share for the six months ended June 30, 2012. Compared with net income of $0.8 million or $0.02 per diluted share for the second quarter of 2011 and net loss of $6.8 million or $0.22 per diluted share for the six months ended June 30, 2011, James River Coal Co. has collapsed from positive quarterly income to a substantial negative profit over the last four quarters. With a hefty amount of debt to pay off and the incentives for coal consumers to switch to natural gas, James River Coal Co. and other coal producers could continue their downward path.

Invest in Gas Turbine Makers
Gas turbine makers are looking forward to a surge in new orders. Stanford C. Bernstein forecasts the global market for utility-sized gas turbines, now worth $15 billion, is set for many years of growth. In 2011, U.S. gas turbine projects under construction hit a more than decade low of 64, down from the highs of close to 600 in the year of 2000. The U.S. in the past represented 50% of the international industrial gas turbine demand, which significantly declined to 8% in 2011. Bernstein analysts estimate 74 projects to be in place for 2012, a slight incline, the first since 2008, that will likely continue over the next couple years. Two major gas turbine makers, General Electric (NYSE:GE) and Siemens (SI), have spent over $500 million each, this year, on the development of their newest models. In the U.S. and other countries containing enormous gas reserves, demand for gas turbines will see tremendous growth if gas prices stay low and more air pollution regulations are put in place.

In 2008, fossil fuels were on a major downward path. Oil prices skyrocketed to over $140 a barrel, at the same time as an economic recession took place. Companies, such as car manufacturers, started building more efficient products that use less oil. Alternative resources to fossil fuels became further cost effective. Many plastics became plant based. Oil and gas companies searched for new places to drill. Gas prices exceeded $13. The search for future, less costly, resources was on.

Recently, the situation of natural gas has flipped. Priced 80 percent cheaper since the middle of the last decade, natural gas could see much greater demand. Between 2011 and 2012, the U.S. experienced one of the mildest winters on record, leading consumers to use less gas for heating. During the Spring of this year, gas sold for less than it cost to produce. The negative margins on gas lowered the first-quarter profits of large gas producers, such as Exxon Mobil (XOM). Since 2008, the quantity of proven U.S. gas reserves increased, at the same time as natural gas demand subsided, causing a price downfall. At current prices, natural gas could see a hike in demand due to cost effectiveness and pollution regulations.

Over the next couple years, electricity production could be a growing source of demand for gas. Natural gas, during electricity production, produces half the carbon that coal emits and does not emit the environmentally harmful elements of burning coal, such as sulfur and mercury. From being cost effective and more environmentally friendly than coal, utility companies have switched from coal to gas to run their power plants. Atlanta-based Southern Co. (SO), the largest electricity generator in the country, now gets 47 percent of its electricity from natural gas, up from 16 percent five years ago, and is planning on doing more conversion projects in the near future. Throughout the U.S., the electricity generated by gas plants has risen more than 50 percent over the last decade, while coal generation has declined slightly.

Even before gas became so plentiful, gas-fired stations had considerable advantages. The far more environmentally friendly gas-fired stations are quick and cheap to build, costing a third the price of coal-fired ones. Unlike coal power stations, gas power stations can turn on and off electricity production with the flick of a switch, instead of burning the same amounts of coal throughout peak and off-peak times.

With these recent changes in the oil and gas industry, it's important to determine what energy securities to take a position in. The following are some ways of entering the energy boom.

How to Play Gas:

Buy Companies with Large Stake in Shale Fields
As demand for gas grows, production of gas will need to meet the needs of consumption. The more proven gas reserves a company controls, the longer it will meet demand and profit. A company like Chesapeake energy (CHK), is a great example, with plenty of shale to meet demand and produce long-term growth. Chesapeake energy owns 2.2 million acres of natural gas shale fields in the United States. For the second quarter, Chesapeake energy beat analyst estimates for sales, but missed profit expectations. The company had a very low P/E ratio of 6.44 and a large net profit margin of 30.60 percent. Even with gas prices extraordinarily low, Chesapeake energy's net profit margin has more than doubled since the first quarter.

Recently, Chesapeake energy released that its total economically recoverable gas reserves have dropped due to current $2.74 per MMBTU prices. The write-downs consisted of 4.6 trillion cubic feet, a 24% drop from the previous 18.8 trillion cubic feet of economically recoverable gas reserves. BHP Billiton (BHP), another large natural resource company, on August 3, announced a near $3 billion write-down on some of its American gas fields. From gas prices slumping around 10-year lows, many previously cost effective drilling locations have lost economic viability. A natural gas company's total economically recoverable gas reserves directly correlates with the price of gas futures; therefore Chesapeake energy will have more economically recoverable resources if prices ascend and less if prices descend. Furthermore, Chesapeake energy and BHP Billiton are strong buys if you're in favor of natural gas prices going on the rise.

If you're interested in other companies with great stakes in natural gas resources, Royal Dutch Shell (RDS.A) might be a consideration. Shell, over the next couple years, has a major position in natural gas. Among many drilling plans, Shell is building the first floating LNG ( liquified natural gas) terminal off the coast of Australia. The project will have a capacity of 3.6 million tones a year, extracting gas through the world's largest boat. As interesting as it sounds, the floating LNG station will be a long wait, planning to start production in 2017. Expenses from drilling plans could hurt short-term shareholders, but might be a vital investment to make Shell more lucrative long term.

Short (Going Short): Coal Companies with Loads of Debt

Strict new air pollution laws, passed in the U.S. last year, will speed-up the rate of coal power plants retiring and the construction of new gas-fired power plants. At Sanford C. Bernstein, analysts believe 66 gigawatts of coal-fired electricity generation, about 6.5% of U.S. electrical capacity, will shut by 2015, all replaced by gas and renewable. Other countries with enormous shale-gas reserves, such as China and Australia, have barely begun drilling, however, have major plans to exploit natural gas resources in the near future. Australia has an estimated $200 billion worth of planned LNG (liquid natural gas) projects for the near future, aiming for the industry to triple current production to 60 million tones a year by 2020.

Coal companies with loads of debt are more likely to further struggle than those with minimal quantities. Debt in a company can have a byproduct of growth, but in an industry that's traveling downward, it can have the opposite effect. James River Coal Co. (JRCC) has debt of almost seven times its market capitalization and a debt-to-equity ratio of 152.72. Its levered free cash flow (cash position after debt interest is paid off) is -$51.66 million, over half its market capitalization. During its second-quarter earnings call, James River Coal Co. announced that it had net loss of $25.8 million or -$0.74 per diluted share for the second quarter of 2012 and net loss of $41.4 million or $1.19 per diluted share for the six months ended June 30, 2012. Compared with net income of $0.8 million or $0.02 per diluted share for the second quarter of 2011 and net loss of $6.8 million or $0.22 per diluted share for the six months ended June 30, 2011, James River Coal Co. has collapsed from positive quarterly income to a substantial negative profit over the last four quarters. With a hefty amount of debt to pay off and the incentives for coal consumers to switch to natural gas, James River Coal Co. and other coal producers could continue their downward path.

Invest in Gas Turbine Makers
Gas turbine makers are looking forward to a surge in new orders. Stanford C. Bernstein forecasts the global market for utility-sized gas turbines, now worth $15 billion, is set for many years of growth. In 2011, U.S. gas turbine projects under construction hit a more than decade low of 64, down from the highs of close to 600 in the year of 2000. The U.S. in the past represented 50% of the international industrial gas turbine demand, which significantly declined to 8% in 2011. Bernstein analysts estimate 74 projects to be in place for 2012, a slight incline, the first since 2008, that will likely continue over the next couple years. Two major gas turbine makers, General Electric (GE) and Siemens (SI), have spent over $500 million each, this year, on the development of their newest models. In the U.S. and other countries containing enormous gas reserves, demand for gas turbines will see tremendous growth if gas prices stay low and more air pollution regulations are put in place.

Disclaimer: This article is for informational purposes only, it is not a recommendation to buy or sell any security. Every investor is strongly encouraged to do their own research prior to investing.

Source: How To Play The Natural Gas Boom