Natural Gas: 3 Ways to Play America’s New Electricity Titan

Ever since fracking came to town, coal has been back on its heels. Natural gas is officially here to stay and has finally overtaken coal as America’s No. 1 source of electricity generation, much to coal’s chagrin.

Light BulbsAfter years of abundant natural gas production, lower prices and expanded rules targeting coal, natural gas’s piece of the energy pie has grown to reach about 31% of electric power generation this past April, vs. coal’s 30%.

According to a new report by research firm SNL Energy, which used data from the U.S. Energy Department, the amount of electricity generated with natural gas climbed 21% year-over-year. That climb compares to a 19% decline for coal generation.

And by all accords, natural gas should continue getting the nod from utilities. Power generators continue to install natural gas turbines at a record pace as the combo of increased regulation and lower prices for the fuel make it hard to use coal. The Energy Department estimates that 90 gigawatts’ (GW) worth of coal-fired power plants will be retired by the year 2040.

But coal’s pain is a huge win for natural gas and energy stocks that produce it.

More importantly, it can be a huge win for investors that bet on the right fuel as the switch continues. Here are three ways to play natural gas as America’s new electricity titan.

Natural Gas Energy Stocks: General Electric (GE)

General-Electric-GE-stock-blue-chip stocksGeneral Electric (GE) isn’t usually the first thing that comes to mind when people think about energy stocks. Most people still associate the company with light bulbs and dishwashers. However, GE is actually a two-pronged play on natural gas.

First, GE is the world’s largest supplier/producer of natural gas turbines used in power plants. According to McCoy Power Reports, GE holds a leading 29% market share. That market share is set to rise as the industrial firm completes its buy-out of France’s Alstom SA (ALSMY). That buyout strengthened its product offerings in combined cycle technology as well as increased its footprint in turbine sales.

And with GE estimating that natural gas will account for 25% of all new electricity generation over the next ten years, its dominant market share will be the key to winning new contracts.

Secondly, GE has plowed head-first into the oil & gas industry and now has product offerings including everything from pump-jacks and blow-out preventers to fracking motors and natural gas compression equipment. That makes GE just as much of a play on producing natural gas as it is for using the resource.

Meanwhile, GE still remains a fairly valued industrial buy. The stock’s forward P/E isn’t too expensive at 17, and since cutting its dividend during the recession, GE has restored it in spades. General Electric now trades with a 3.4% dividend yield.

Natural Gas Energy Stocks: Fluor Corporation (FLR)

fluor-flr-stock-185If GE is building the natural gas turbines, then Fluor Corporation (FLR) is building the entire plant. Over the past 20 years, FLR has designed, built and commissioned more natural gas powered plants than any other firm.

In fact, over the past decade, FLR has built more than 30% of all new capacity in the United States. That legacy endures today, as FLR continues to rack up new contracts for natural gas-fired generation plants.

All in all, FLR’s total backlog of new projects grew by $4.4 billion dollars to reach $41.2 billion at the end of the first quarter.

Despite the growing backlog and wins in natural gas and other major infrastructure project, FLR stock has fallen pretty hard over the last year due to its exposure to the oil & gas industry. However, this roughly 35% drop could be used as a buying opportunity.

Most of Fluor’s projects are large, long-term commitments which are less exposed to short-term fluctuations in the price of oil. Its natural gas generation projects are no exception.

At the end of the day, FLR is cheap at forward P/E of 11 and the firm will continue to be the contractor du jour when it comes to expanding our natural gas generation infrastructure.

Natural Gas Energy Stocks: Columbia Pipeline Group (CPGX)

columbia-pipeline-partners-185Getting all that natural gas into power plants requires miles and miles of interstate pipelines. And recent spinoff Columbia Pipeline Group (CPGX) has some of the best.

CPGX was let loose by utility NiSource (NI) at the beginning of July. And while it features more than 15,000 miles’ worth of natural gas pipelines and gathering systems, more than 80% of those lines are large-diameter interstate trunk lines. Those are the kind that feed into power plants. In fact, more than 3 billion cubic feet of natural gas per day flows throw CPGX’s transmission lines.

Some of that gas flows directly customers served by NiSource. However, a lot more of it makes its way to power plants.

The real win for Columbia is that this network of trunk lines is located in 10 states in the Northeast, Mid-Atlantic and Midwest. This swath of the country is where many old coal plants are being retried and new natural gas plants are being built. That gives CPGX a huge edge in supplying the future needs of these plants.

As for more immediate growth plans, CPGX has plenty of expansion plans for gathering line in the Marcellus and Utica shales as well as plans to drop-down assets into its MLP: Columbia Pipeline Partners LP (CPPL). All of these factors should boost cash flows and dividends at CPGX into the future.

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

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