The domestic natural gas industry has fallen on hard times due to a supply glut and a sharp fall in commodity prices over the course of the last year, but with last week’s latest news things are beginning to look up again. T. Boone Pickens, the long time crude oil bull turned alternative energy maven, has begun working on legislation that is gathering very impressive bipartisan support. The conveniently named NAT GAS Act (New Alternative Transportation to Give Americans Solutions) was introduced by Pickens along with Senate Majority Leader Harry Reid (D-NV), Senator Robert Menendez (D-NJ), and Senator Orrin Hatch (R-UT) in a letter to President Barack Obama on July 8th, 2009. The group’s legislation provides a real fundamental shift in the way investors should analyze natural gas companies, especially those in the natural gas transportation industry such as Energtek, Inc. OTCPK:EGTK.
This proposed bill represents one of the final stages of Boone’s “Picken’s Plan” to free the United States from economically and politically crippling foreign crude oil imports. Listed below are some of the aspects of the bill that I believe have an above average chance of being put into law, especially when considering all of the first stimulus funds have not been spent and that there is growing talk of a second stimulus package.
- Makes all dedicated natural gas-fueled vehicles eligible for a credit equal to 80% of the vehicle’s incremental cost. Only some dedicated natural gas vehicles currently can qualify for an 80% federal tax credit
- Makes all bi-fuel natural gas-fueled vehicles eligible for a credit equal to 50% of the vehicle’s incremental cost. This is the first time bi-fuel vehicles would be eligible for a federal tax credit
- Increase the allowable incremental cost limits to more accurately reflect the cost of producing or converting natural gas vehicles:
- For light-duty vehicles, the purchase tax credit cap would be increased to $12,500 (currently $5,000)
- For all other vehicle weight classes, the purchase tax credit cap would be doubled
- Increases the refueling property tax credit from $50,000 to $100,000 per station
- Allows the natural gas vehicle and natural gas fueling infrastructure credits to be transferred by the taxpayer back to the seller or to the lessor
- Allows state and local governmental entities to issue tax exempt bonds in order to finance natural gas vehicle projects
- Allows 100% of the cost of a natural gas vehicle manufacturing facility that is placed in service before January 1, 2015 to be expensed and to be treated as a deduction in the taxable year in which the facility was placed in service. This decreases to 50% after December 31, 2014 and is phased out by January 1, 2020
- Requires that when complying with mandatory federal fleet alternative fuel vehicle purchase requirements, federal agencies shall purchase dedicated alternative fuel vehicles unless the agency can show that alternative fuel is unavailable or that purchasing such vehicles would be impractical
- Provides for grants for light- and heavy-duty natural gas engine development
As you can see, all of these measures are constructed to spur demand for natural gas transportation, consumer natural gas demand, and fueling station infrastructure. Energtek classifies itself as a company that “provides proprietary solutions to meet the technical, economical and logistical challenges of Natural Gas (NYSEMKT:NG) delivery for vehicles worldwide, with a major focus on the 2- and 3-wheel vehicles market, and on Bulk Transportation markets.” The reason this type of bill would be so valuable to a company like Energtek is because it will create incentives for consumers to purchase products that are made up of or benefit from products Energtek produces at little to no additional cost to either the consumer or Energtek. With the green movement gaining steam rapidly over the last few years, what reason would a consumer have to not use natural gas based transportation when the government will gladly foot most of if not all of the bill for you?
One of the ways I like to fundamentally track the relative value of natural gas is through its historical trading spread compared to crude oil. This can be useful for short and intermediate term investing as the spreads between these commodities will more than likely revert back to the mean over long periods of time barring any huge fundamental shift. The current spread is 17.27:1 in terms of the price of a barrel of crude oil to the price of a Mcfe (thousand cubic feet equivalent) of natural gas.
From 1980 to today, this spread has averaged closer to 8.5:1. Based on the amount of energy found in each of these units, in this case BTUs (British Thermal Units), crude oil only holds 5.8 times the energy as a unit of natural gas. This tells us that on a historical basis, natural gas is close to the most undervalued relative to crude oil that it has been over the course of the last three decades. Obviously the current economic environment has created a depressed market for natural gas to allow investors to take advantage of this tremendous long term opportunity, but there is no guarantee that this opportunity will remain as attractive for any extended period of time.
Even with the overwhelming bullish sentiment from Washington, investors, analysts, and environmentalists, there are still many risks when investing in a company like Energtek. Firstly, Energtek is a micro-capitalization company that will be more susceptible to market fluctuations based on size alone. Secondly, the current domestic supply glut of natural gas does not look like it will clear up any time soon based on the storage data that has been reported over the course of the last three months. Thirdly, the company is still very young and in a developmental stage leaving the risk of failure without successful product innovation and financial prudence.
Before investing I would highly recommend reading through the company’s latest 10-K and two latest 8-K disclosures through the S.E.C. It is important to note the company’s employee stock based compensation package and the fact that Energtek has yet to turn a profit during any quarter of its operation. These are two fairly common characteristics of start-up type companies and shouldn’t be very alarming to investors as long as they are duly noted. Energtek definitely is the type of company that has the wind at its back but it will need to execute on a high level to achieve the success its investors are seeking.
- Charles W. Petredis
Disclosure: No positions.