Best Stocks And ETFs For A Natural Gas Energy Boom

Natural Gas StocksAn abundant, cheap energy source sits underground and could be the fuel needed to spur economic growth for decades to come.  It’s not oil, though the U.S. is seeing a renaissance in oil production of late.  It’s natural gas and there are so many ways to play this energy source.

Energy drives economies.  When a cheap, abundant energy source comes around, it has long-term benefits to more than one industry.  As the price of natural gas has sunk to all time lows, it’s forced industries to view it as a primary source of energy.  Which opens the door for investors to profit from it.

First we need to find the industries and then we can dig for the best stocks and ETFs to profit from this natural gas energy boom.

The Producers

The number of natural gas producers is immense.  Many are involved in exploration, production and distribution.  If that wasn’t enough you can probably add oil production and exploration to their resume.  With natural gas prices at all time lows, now might be the time to start getting into the producers.

The best place to start is with a natural gas ETF like: First Trust ISE-Revere Natural Gas Index (FCG).

  • Linn Energy (LINE)
  • Exxon Mobile (XOM)
  • Devon Energy (DVN)
  • Southwest Energy (SWN)
  • EOG Resources (EOG)
  • Range Resources (RRC)
  • Sandridge Energy (SD)

The Pipelines, Storage, & Exports

The pipelines are just the distribution system of natural gas.  What was once limited to regional supply lines delivered to the utilities has now become a big business.  As natural gas use increases so will the miles of pipeline, the amount transported, and the profits.

The pipelines are just oil and natural gas tollways.  These companies charge a fee for the amount transported, stored, or exported.  These companies don’t own the natural gas, they just move it and get paid generously.  Because of the high cost to build, most of the pipelines are near monopolies in a region.  These are cash flow driven companies that usually pay out quality dividends.

Again the best place to start is with an ETF like: Alerian MLP Index ETN (AMJ).

  • Kinder Morgan Energy Partners (KMP)
  • Enterprise Product Partners (EPD)
  • Energy Transfer Partners (ETP)
  • Enbridge Energy Partners (EEP)
  • Chart Industries (GTLS)
  • Cheniere Energy (LNG)

Note: Many of these are MLPs (Master Limited Partnerships) and may have added tax risk.

Equipment & Services

All of this potential needs equipment suppliers. Think of this as selling shovels in a gold rush. The services and equipment needed to drill for and support production is ongoing. Things like new equipment, replacement parts, and water recycling and disposal are long-term needs.

The concerns over fracking and environmental safety aren’t going away either. As state and EPA regulations change, gas producers will rely more on the environmental service providers to stay in compliance.

There are several ETFs built around the equipment and service providers:

  • Market Vectors Oil Services ETF (OIH)
  • iShares Dow Jones US Oil Equipment Index (IEZ)

Or start your research with these stocks:

  • National Oilwell Varco, Inc. (NOV)
  • Halliburton Company (HAL)
  • Weatherford International Ltd (WFT)
  • Nuveera Environmental Solutions (NES)

Note: Don’t overlook the fact these companies supply the booming oil industry too.

The Utilities

Can we all say cheaper electricity.  Electric utilities have converted from coal to natural gas burning plants in the last several years.  A plant burning natural gas produces half the carbon emissions as coal.  With an abundant supply of cheap natural gas, it lowers costs and helps meet stringent EPA standards.  If the cost savings aren’t passed on to consumer, it will be passed on to the shareholders through dividends.

You can own an ETF like the Utilities Select Sector SPDR (XLU) or individual stocks:

  • Exelon (EXC)
  • Duke Energy (DUK)
  • Consolidated Edison (ED)
  • PG&E (PCG)
  • Dominion Resources (D)

Transportation

The sector with the most potential will be transportation.  If, and it’s a big IF, natural gas is successfully adopted as an alternative fuel to gasoline, it could be a game changer.  Currently a gallon equivalent of natural gas costs about half that of gasoline.  If certain companies get their way, it could be even cheaper.

Several cities have already made changes with public transportation by converting their buses over.  Companies like Waste Management, UPS and AT&T have started converting their fleet vehicles, too.  Even Caterpillar announced a partnership to design natural gas engines for their line of equipment vehicles.  The big question lies in how quickly the public will adopt the change.

The first thing that needs to change is the gas station infrastructure.  Nobody’s buying a natural gas vehicle without a gas station supplying it nearby.  The process will take time.  At the moment there is only one company making the effort:

  • Clean Energy Fuels (CLNE)

The next change must come from vehicle conversions.  There are several companies with the technology to convert gasoline or diesel engines to natural gas engines.  The other option is new natural gas engines and eventually new natural gas vehicles:

  • Westport Innovations (WPRT)
  • Fuel Systems Solutions (FSYS)
  • Cummins (CMI)
  • Navistar International (NAV)
  • Ford (F)
  • General Motors (GM)
  • Caterpillar (CAT)

Ever thought of having your own gas pump at home?  It’s possible with natural gas, as long as you have access to a gas line running to your house.  It’s an untapped market, but the technology has been around for years.  The upfront costs for the pump will set you back, but it would lower the price of natural gas to what your gas utility charges.

Bottom Line

The biggest thing holding natural gas back is distribution and acceptance.  The old natural gas distribution channels were limited regionally.  But the oversupply of natural gas has brought an increase in infrastructure spending to improve distribution networks.

Whether it’s the energy of the future or just a gateway fuel to more environmentally friendly energy sources, more industries are benefiting from cheap natural gas.

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