Can Natural Gas Ignite Your Portfolio?

by: Brian Burns

Fluctuations and increases in oil prices can have a detrimental impact on gasoline prices which can negatively affect the U.S. consumer and overall economy. These fluctuations may be related to supply issues or fear of political instabilities in oil rich regions. The U.S. Energy Information Administration (EIA) stated that 41% of U.S. petroleum imports came from OPEC countries in 2009. But the United States has the resources available to put some pressure on oil and gasoline prices by further developing and utilizing one of its great gifts: natural gas.

Clean, and Plenty of It

The known quantity of natural gas reserves in the U.S. has grown significantly with the discovery of shale gas resources. According to the EIA, the U.S. possesses 2,552 trillion cubic feet of potential natural gas reserves. But why switch to another fossil fuel? The reason is that natural gas is the cleanest fossil fuel -- is cheaper than gasoline, plentiful in the U.S., and a fuel that is able to fulfill a large portion of the country's energy needs.

Fossil Fuel Emission Levels

Pounds Per Billion Btu of Energy Input

[Click all to enlarge]

Source: EIA

If you've been hearing more noise about natural gas lately, it may be due in part to the increased coverage that the Pickens Plan has generated. The brainchild of T. Boone Pickens, the plan describes how the U.S. can use natural gas to create cleaner energy and become less dependent on foreign oil. His plan also calls for increasing wind and solar power capacity. I don't want to rehash the whole plan here; you can check out Pickens' plan on his website.

There is also a piece of natural gas legislation that is being considered, The NAT GAS Act of 2011. Also known as H.R. 1380, the legislation "... includes an extension of the current tax credit on natural gas fuel, a new tax credit for production of natural gas vehicles and a tax credit for installing natural gas refueling stations."

Congressman Jim Matheson, supporter of the act and chair of the Blue Dog Energy Task Force, states that, "Promoting natural gas fueled vehicles is a win-win-win; consumers will have less pain at the pump, America will become less dependent on foreign oil and will see more energy jobs and cleaner environment."

Investing in Natural Gas

If the NAT GAS Act is passed, then natural gas-related stocks are going to have a little celebration. But what if it doesn't pass?

A cautious approach to investing in natural gas may be wise, considering that the potential supply of natural gas has ballooned with the discovery and ability to harness shale deposits. The good news is that there are other catalysts out there that bode well for the natural gas industry. Many cities in the U.S. have already been converting their transportation fleets to natural gas vehicles. In addition, many companies have begun the process of converting their fleets to natural gas.

Delivery company United Parcel Service, Inc. (UPS) has been upgrading its fleet with CNG (Compressed Natural Gas) vehicles by converting older diesel engines to natural gas and purchasing vehicles that were built as CNG vehicles. According to the UPS website, the company employs more than 1,000 CNG delivery vehicles which have reduced particulate emissions by 95% from diesel engines.

Another large natural gas fleet is that of Waste Management (WM), which has over 425 natural gas vehicles it claims have eliminated the consumption of 4 million gallons of diesel fuel per year. In addition, greenhouse gas emissions are estimated to be reduced by 4,000 tons.

Even Mickey Mouse is eyeing the benefits of natural gas as The Walt Disney Company (DIS) has converted all Disneyland Resort trams to CNG. The switch is estimated to eliminate 50,000 gallons of diesel fuel per year.

The switching of fleets to natural gas is a big part of the Pickens Plan. The lack of CNG refueling stations is going to be a major roadblock in attempting to transition the individual consumer to a CNG vehicle. However, fleets that typically refuel at the same locations don't have the same drawback as it is easier to install large refueling stations in key areas. Also, while electric vehicles may show some promise for commercial vehicles, the technology does not exist to be able to fully power an 18 wheeler or other large fleet vehicle in an efficient manner.


About one out of every three barrels of imported oil goes into the manufacture of diesel fuel for tractor-trailers to move goods around the country. If over the next decade, trucking companies large and small replaced their diesel vehicles with trucks running on either Compressed or Liquified Natural Gas, we would very nearly meet our goal of cutting oil imports by 30% right there.

Natural Gas Stocks

Natural gas should see increased demand, not only with the potential passage of the Natural Gas Act, but also by companies upgrading their fleets to natural gas vehicles. Switching to natural gas isn't going to happen overnight, so you have time to do plenty of due diligence on any potential natural gas investment. There are a number of different ways to get invested in natural gas, whether that be companies focused on pipeline and distribution, production and exploration, and vehicle conversion and refueling companies.

Pipelines and Utilities

For pipelines and related infrastructure, I would look into Kinder Morgan Energy Partners (KMP), which has approximately 15,500 miles of natural gas transmission pipelines and is a major player in the distribution of natural gas. Another pipeline and storage play would be Spectra Energy Corp. (SE), which was part of Duke Energy Corp (DUK) until early 2007. Spectra boasts a transmission pipeline network of 14,300 miles. A third company to consider is El Paso Pipeline Partners, L.P. (EPB), which operates as a subsidiary of El Paso Pipeline Holdings, L.L.C.

The other related area to look into is the utility sector. Sempra Energy (SRE) is a regulated public utility that provides natural gas distribution and services in California. Another utility worth taking a look at is Southwest Gas Corporation (SWX). A smaller gas utility company that may see more upside potential is Southern Union Co. (SUG).

The benefit of going with a pipeline or gas utility is that they all sport a nice dividend yield. Below are the current yields for the above mentioned stocks.

Source: Yahoo Finance

Exploration, Production, Refueling & Vehicle Conversion

The pipeline, transmission, and utility sector may represent a higher yielding investment and may be less volatile than the alternatives, which include exploration, production, refueling, and engine conversion. However, these alternatives should provide a greater overall return on capital if natural gas demand continues to increase and/or begins to increase at a faster rate than expected.

The big names in this space are going to be the exploration and production companies. Names in this space that I recommend include Chesapeake Energy Corporation (CHK), Devon Energy Corporation (DVN), EOG Resources, Inc. (EOG), BP p.l.c. (BP), and Exxon Mobile (XOM). Typically you won't find high yields in the exploration and production space, but two notable exceptions from this group are Exxon and BP. Exxon currently sports a 2.30% yield while BP sits at a respectable 3.70% yield. The other names in this space currently have yields of 1% or less. Below is a snapshot of the proved natural gas reserves for each company mentioned.

Source: Company websites, annual reports, quarterly reports.

A more speculative but potentially rewarding way to invest in an anticipated natural gas boom is to invest in companies that will facilitate the installment of refueling stations and companies that make the equipment for natural gas vehicles. One name I would recommend would be Clean Energy Fuels Corp. (CLNE), which constructs and operates CNG and LNG fueling stations and has exposure to the sale of equipment and vehicle conversions. Clean Energy will be more prone to volatility than the utilities and other names, especially if the NAT GAS Act fails, so just keep that in mind before investing.

Disclosure: I am long CHK.