Tuesday, July 30, 2013

Investing in the Future of Natural Gas: Making Money Reducing the Carbon Footprint.

America's current plan for tackling climate change is less than stellar... or even all that existent in reality. But of particular note has been some recent comments by President Obama in a speech at Georgetown University

President Obama declared that America would reduce its annual carbon pollution by 50% over the next 20 years. To achieve this, he plans to empower the Environmental Protection Agency to create carbon emission standards for new and existing power plants. 

Why should this news be relevant for the Intelligent Investor?

If electricity producers have to limit the amount of carbon pollution that they emit, a strong and natural incentive will develop to shift from coal to natural gas. Natural gas has been an alternative for years, but in the last few years the price has dropped to such a level to make it increasingly more attractive when compared to coal, especially if emissions become a concern.

Natural gas reached its lowest level in a decade last spring, but there is a very long lead-time from when a power plant is planned, and when it actually begins buying fuel for production. This means that the low price point reached last spring, could be the start of a very long up-ward trend in natural gas prices as large scale buyers of natural gas, such as power plants, finally start utilizing the fuel in their completed operations. 

Other key demand drivers for natural gas are: transportation fuel, LNG exporters, and residential and commercial heating.

People have long been declaring the growth of natural gas utilization for transportation, but there is now increasingly more evidence that predictions are finally coming to fruition. Major companies such as Waste Management and UPS have already made the commitment by buying fleets of natural gas trucks, while other key transportation players in the rail-road industry, such as Norfolk Southern and Union Pacific, are seriously considering converting many engines to natural gas. 

Right now, supply for natural gas in North America is very high (especially from recent shale gas production), and for an investor, that means prices will remain low right now and profit margins may not currently be as high as investments in oil, but once demand for natural gas increases, and price comes up to an equilibrium, a lot of the investment money will already be made by those in on the ground floor. 

Where can the Intelligent Investor find an investment in natural gas?

Encana is Canada's largest natural gas producer, and easily one of the markets purest ways to invest in natural gas production. Second quarter operating profit at the company increased 25 percent recently as volumes at the company soared.

Capital spending at Encana for the year is expected to be in the $3 billion range, which will be above current cash flow levels. This means that the company will have to sell some assets or borrow money in the short-term, but as natural gas prices rise, or capital expenditures decline, free cash flow at Encana will leave shareholders with plenty of money leftover for dividends and share buybacks.

Cheers and Happy Investing.

Matthew Clarke. 

(Full Disclosure: Matthew Clarke's clients and family may own or hold shares in Encana)

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