Natural Gas: The Alternative Clean Energy Investment

Feb. 24, 2008 12:01 PM ETDVN, NBR, OVV, PESX, SBOW, HP, BRNC, PDE, PGHEF, CHK, PDS, PBA15 Comments
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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

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ESP is a buy-side equity research firm that manages an options income equity fund. We specialize in the following industries: Renewable Energy, Energy, Commodities, Electrification of Everything(EoE), EV's, Software, and the New Energy Economy.We also offer energy consulting services to businesses, utilities, and municipalities enabling the transition to the 100% renewable economy. ESP also provides Electric macro grid and microgrid modeling services. You can see our current top stock picks, and former trades dating back from 2008 on our Motley Fools CAPS page. Since 2008 our accuracy record is over 80% beating the S&P 500 index.
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