KurtEng (34.26)

A Case for Natural Gas

July 22, 2010 – Comments (0) | RELATED TICKERS: STR , DVN

In 2008, natural gas accounted for 2% of energy used for transportation in the US. I explained why I believe that gasoline’s market share in the transportation sector will decrease in a previous post.  You can also check out this report for more information here.  Now I’ll make my case for using natural gas for transportation and add some stocks that I think could benefit.

It’s not a question of ‘if’ it’s a question of ‘to what extent.’

Businesses and individuals are already using natural gas. Honda has been selling a natural gas version of the Civic for years. This is happening, but how far it will go is less certain. I was actually surprised that 2% of the transportation sector is using natural gas now, considering I cannot remember seeing a natural gas vehicle at a car dealership in the Midwest. Right now the biggest users of natural gas vehicles seem to be in the southwest.  Quester (STR) has been successful selling natural gas for vehicles and their prices are on web. $1.50 per gallon equivalent sounds pretty attractive, doesn’t it?

Cases for natural gas vehicles

-          Natural gas is relatively cheap and domestically produced

-          It’s cleaner burning than gasoline

-          Here’s a slightly optimistic list of other advantages

-          Most of the infrastructure is already in place. The pipelines already exist, it’s just a matter of installing the service stations

Of course not everything is roses and sunshine for natural gas, so here are some of the disadvantages of natural gas vehicles

 -         Right now it’s only for commuting. Finding place to refuel on longer trips in a natural gas vehicle is possible, but I wouldn’t want to do it yet.

-          Vehicle price is higher. I think a large portion of the additional cost is due to lower sales volume but for now they are more expensive.

-          There is a minor uproar about gas extraction techniques. I’ll talk about this below.

-          Lower cruising distance per tank. I don’t think this can be solved easily.

Hydraulic fracturing has drawn the ire of certain people lately. My feeling is that it is overblown, mostly by the makers of Gasland. I found someone who seemed intelligent who wrote about the process here . Of course, if there are real issues with the technique then I don’t support it, but it seems like people just making a fuss right now.  Remember when a nude model got people to stop immunizing their children because it causes autism? I think the fracking uproar will blow over after some time.

Natural Gas Stock Picks

I’m going to go out on a limb and say that if 5% of the US transportation energy demand is not met with natural gas by 2020, I will eat a big piece of humble pie.  My lowly CAPS character will also be forced to commit seppuku.  I think the companies that stand to profit the most are natural gas producers and distributors. I really like distributor stocks because there are many choices of solid companies that do well in nearly any business environment and pay healthy dividends. I own stock in VVC, PNY, and WGL and I am completely satisfied with their performance when the dividends are included. These businesses have a real opportunity for growth if they can add transportation energy to their business.

So here are my two major recommendations for a natural gas play: for producers I like Devon Energy (DVN) and for distributors is like Questar (STR) because they are already supplying natural gas vehicles in Utah and Wyoming. I currently own DVN and I am looking to buy STR. Any other stock suggestions are more than welcome.