Obama Vs. Frackenstein

Includes: MTZ, NEE, UNG
by: Harris Roen

Regular readers know that I support domestic natural gas as an important fuel source. Natural Gas is critical to achieving a smaller carbon footprint, while at the same time promoting jobs and energy independence in the U.S. Even though all energy choices have environmental impacts, natural gas has a particularly thorny pollution problem. The drilling method used to make domestic wells so productive, hydraulic fracturing or fracking, has many known issues. It also has some large looming questions that need to be resolved. In a positive move, the Obama administration recently decided to directly take on the issues associated with fracking.

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An executive order was issued this week to establish a "high-level, inter-agency working group" to facilitate efforts to "support safe and responsible unconventional domestic natural gas development" (what the President means by 'unconventional gas' is shale gas that is extracted using hydraulic fracturing). The goal is to untangle overlapping and complicated federal regulations in order to smooth the way for shale gas development, while still having an eye on environmentally safe practices.

The Executive Order named 13 agencies to be involved in the coordinating effort, including the Departments of the Interior, Health and Human Services, Energy, and the Environmental Protection Agency (EPA). The Order also recognizes states as the primary regulators on non-federal lands, which is where the bulk of shale gas lies.

Overall, industry has responded favorably to the Executive Order. The American Gas Association was "pleased" to see the action, and the Business Roundtable calls it a "solid first step" to "cut through these complications." On the environmental side, many groups want to encourage natural gas as the best choice among fossil fuels, but are concerned about company practices. For example, the Sierra Club looks forward to engaging with the Inter-agency Working Group to "provide the support and policy solutions they need to be successful in protecting American families from an industry run amok."

The problem lies in the fact that the natural gas industry has enjoyed a lack of environmental protections to date. Back in 2005, Congress exempted hydraulic fracturing from federal environmental regulations and laws, including the Safe Drinking Water Act, as a result of efforts by lobbyists and then Vice President Dick Cheney which has come to be called the "Halliburton Rule." The ensuing unregulated environmental problems are catching up to the industry.

Resolving problems associated with fracking is a must-solve issue, since shale gas is projected to make up almost half of natural gas production in the U.S. in the next 25 years. While there is no perfect way to supply all the energy needed to sate the appetite for power consumption in this country, natural gas appears to be the best alternative to coal and nuclear for base-load electricity in the near future.

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What does this Inter-agency Working Group mean to investors? If successful, it will allow the natural gas industry to continue to grow in the U.S. Though domestic natural gas producers are attractive as a long-term investment, low natural gas prices, due to an abundant supply, have made it a very competitive field with thin profit margins.

There are two excellent ways to invest in the future of domestic natural gas. First, look at utilities that use natural gas as a power source. Second, invest in companies involved in building and maintaining natural gas power generation. Companies I like in these regards are NextEra Energy (NEE) and MasTec, Inc. (MTZ).

NEE is a large Florida-based utility with over 4.5 million customers that generates more than half of its power from natural gas. Its PE is in a reasonable range, between 13 and 14, and NEE is paying a generous 3.9% dividend. Earnings per share are very healthy at around 5.5. NEE always posts high net profit margin and return on assets when compared to other utilities in its industry. I would consider NEE at a fair price if it trades below $51/share.

MTZ is an infrastructure construction company that is active in natural gas (as well as wind and solar). MTZ has had positive earnings since 2008, and annual sales that have increased each year since 2005. It also has a reasonable PE of around 15, and has acceptable debt levels. MTZ looks well priced where it is currently trading, in the $16-17/share range.

Because of the triple benefit of domestic natural gas - reducing pollution, helping the local economy and increasing energy independence - and because there are abundant natural gas supplies, there is no doubt that the government and industry will do what is necessary to allow markets for natural gas to grow.

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