4 Winners From $2 Natural Gas

by Aaron Levitt | April 19, 2012 8:51 am

4 Winners From $2 Natural Gas

A surge in drilling activity across America’s various shale formations has generated a glut of natural gas. Inventories continue to build up as the new drilling techniques have allowed producers such as Chesapeake Energy (NYSE:CHK[1]) the ability to extract the fuel from the trapped rock. The U.S. Energy Information Administration estimates that U.S. storage facilities are holding 60% more gas than normal.

However, this overabundance is not without consequences. The continued inventory build-up has driven prices for natural gas down to historic lows.

Futures pricing for the energy source recently slipped below $2 per million British thermal units (Btu) to sit at $1.983. That’s the lowest it has been since January 2002[2]. While some producers have begun to curtail production and switch to more profitable natural gas liquids (NGL) and shale oil, many analysts predict that the fuel will continue to drift lower. Some even expect natural gas prices to break a dollar.

While those falling prices are certainly having their way with producers of the fuel — Canadian company EnCana‘s (NYSE:ECA[3]) recent performance comes to mind — there are plenty of other reasons to be bullish on natural gas’ sub-$2 price tag. Here’s some of the biggest winners from $2 natural gas:

Manufacturers/Chemical Companies

The manufacturing industry in the United States has a big smile on its face. Record-low natural gas prices have reduced energy costs as well as vital feedstocks for many industries — so much so that some companies in sectors like steel and fertilizers have actually begun the process of on-shoring or returning production back to the U.S. That’s huge news for a sector of our economy that has struggled for decades in the face of low wages in Asia and emerging Latin America.

At the same time, American chemical stocks are enjoying a large cost advantage over their European rivals. Petrochemical firms use ethane as a major feedstock to make ethylene. However, European producers make their ethylene via oil-derived naphtha. Margins for the sector are at some of their highest points in years, and a host of firms have reported better-than-expected earnings.

All in all, a 2011 study by consultancy PricewaterhouseCoopers estimates that as a result of the abundance of natural gas, the U.S. economy could see the addition of about 1 million new manufacturing jobs[4], as well as $11.5 billion in cost savings by 2025.

Utilities

Firms in the utility sector are embracing natural gas in spades. Low costs and the pending EPA crackdown on carbon emissions[5] are helping cement the shift toward fuel instead of coal as an electricity generator. The EIA predicts that coal-burning facilities will slip to just 10% of total new capacity in the U.S. in 2013. That’s down from 18% in 2009. On the other hand, natural gas is expected to soar to more than 82% of new capacity.

The reason for the shift is twofold. First, margins for utilities, like the chemical industry, are increasing. While rates are regulated, buying cheap natural gas still results in higher profits for many utility firms. Second, most big coal-burning utilities like American Electric Power (NYSE:AEP[6]) will have to invest billions of dollars to install pollution-control equipment on their plants. In many instances, it’s cheaper to start from scratch rather than retrofit these coal plants.

For those utilities already using natural gas as their dominate generation source, it’s a win-win.

Midstream/Infrastructure

Exploding natural gas production also is benefiting those within the midstream and infrastructure sectors. The race to tap and access the various shale formations is requiring major investment in new pipelines, storage tanks and gathering systems. The race to connect all of these new power and petrochemical plants is on.

Ultimately, lower natural gas prices will continue to drive demand higher and benefit the midstream firms. That means more jobs and a stronger economy as a whole.

Consumers

Finally, the falling price of natural gas has been a boon to homes and consumers. Throughout the historically high usage period of October-March, U.S. households spent an average $868 on natural gas. That’s a 17% decline versus last winter. While some of that savings has gone to filling up our tanks as oil continues to skyrocket, economists estimate the savings still are helping spur consumer spending. Natural gas also might be the answer to filling up our tanks as well[7].

Without the cost savings as well as the manufacturing job boost, analysts estimate the economy would be in worse shape. Overall, the natural gas boom could help spark the consumer discretionary sector’s revival.

So while the producers of the fuel continue to languish amid unprofitable wells and historically low prices, a variety of sectors are seeing their star shine. Realistically, prices won’t stay in the basement forever, but the U.S. overabundance of natural gas certainly has the ability to continue transforming the economy and benefiting a host of sectors outside the energy industry.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  2. since January 2002: http://www.google.com/hostednews/ap/article/ALeqM5jnh-u09M_fyk41M9ny64j_PP2Ltw?docId=7eeb973d2564459c9470b2928e9314f4
  3. ECA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ECA
  4. 1 million new manufacturing jobs: http://www.pwc.com/us/en/press-releases/2011/abundance-of-shale-gas.jhtml
  5. pending EPA crackdown on carbon emissions: http://investorplace.com/2012/04/capitalize-on-the-epas-coal-crackdown-btu-cld-csx-nsc-unp/
  6. AEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEP
  7. up our tanks as well: http://investorplace.com/2012/04/energy-independence-natural-gas-for-cars/

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