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Natural Gas; the alternative clean energy for the next five years.

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February 06, 2008 – Comments (10)

Now is the time to invest in Natural gas. As an economist, I have been involved in alternative energy issues for the past 4 years. Long term, the US, and ROW(rest of world) need to move away from digging in the dirt(DITD) to produce energy. These non-DITD alternatives would be:

1)Wind power
2)Solar power
3)Geothermal
4)Bio-fuels

While I am very excited about all these energy sources, I firmly believe they are not yet ready for investors. They are all what I call first stage competitors(FSC). Remember all those cute little Internet stocks of the late 1990's? The same will happen to the overvalued solar, and bio-fuel equities IMHO...The problem is both political and economics, but also valuation.

From the political front, the problem is the concept of public goods, and externalities. Go to this paper for a quick read about this issue:

cor.mes.ac.in/DP/envy-ext-Sanka.PD

Without a per unit tax on polluting source of energy, alternative sources of energy will never be economically viable. The problem is that only the most polluting sources of energy creation will be favored in our free market system. Starting in 2009, I believe the US will finally initiate either a cap and trade system, or per unit taxes on pollution. These new taxes/costs for polluting are coming - No other possibility exists. Read the recent article from the WSJ:

http://www.newstrust.net/webx/Stories/files/80204-0014/

This article focuses on coal, but the same will happen for federal gas tax - it will rise significantly. Once the cost increases(as it should) for the polluting forms of energy generation, all other alternative forms will be more viable. Still, Solar, wind and bio-fuels are not ready - the infrastructure is still not fully built, and will not be ready for at least 5-10 more years imho. There is only one possible alternative for the US - Natural gas. The primary component of natural gas is methane (CH4).

The US has just as much NG as it does coal. The primary issue is simply cost factors - NG cost more the extract. A common misconception about natural gas is that we are running out, and quickly. However, this couldn't be further from the truth. Read this for more info:

http://www.naturalgas.org/overview/resources.asp

The US and ROW will start to reduce the practice of using pulverized coal power plants and move to much cleaner NG plants. Also NG powered cars will rise in use with both NG cars, and fuel cell/Hydrogen powered cars increasing in use. Currently the easiest way to get free hydrogen is from methane CH4.

It is becoming clear, natural gas demand and prices will rise. Currently the energy ratio between oil and gas is 6 to 1. Meaning the energy content for a barrel of oil is 6X that of natty gas...So as of today NG is vastly under priced:

ng price = 8, so the oil equivalent would be about $50, almost half the cost of oil.

The only reason NG sells below 10, is that the US has huge cheap to get at coal reserves. But as discussed above, the current use of coal will be made more expensive due to the huge pollution issues with coal. Below is a quick recap about the current pollution of coal and auto oil based fuel:

Dirty Coal-Fired Power Plants and Air Pollution Power plants are a major source of air pollution, with coal-fired power plants spewing 59% of total U.S. sulfur dioxide pollution and 18% of total nitrogen oxides every year.4   Coal-fired power plants are also the largest polluter of toxic mercury pollution5, largest contributor of hazardous air toxics6, and release about 50% of particle pollution.7   Additionally, power plants release over 40% of total U.S. carbon dioxide emissions, a prime contributor to global warming.8 Smog and Ozone Power plants are second only to automobiles as the greatest source of NOx emissions.9   When nitrogen oxide (NOx) reacts with volatile organic compounds (VOCs) and sunlight, smog (ground level ozone) forms. Of the six major criteria air pollutants regulated by the EPA, NOx emissions have historically been the hardest to control. One of the contributing factors is that NOx emissions from huge dirty coal plants in one region can easily pollute areas hundreds of miles downwind. The American Lung Association estimates that almost half-48% or 140.5 million- of Americans live in areas with unhealthy levels of smog.10 When inhaled, smog can cause a wide range of health problems, including immediate symptoms like shortness of breath, chest pains, wheezing, and increased susceptibility to respiratory problems.11   Smog can also cause many more serious problems like increased risk of asthma attacks and lung inflammation. Recently, scientists concluded that exposure to smog can be deadly. Smog affects everyone, but is especially dangerous for children, the elderly, and those with respiratory problems.
I know this is an investment web site - be patient I am getting there! It is obvious to me, the best investments for the next 5-10 years will be natural gas related equities.

As stated in my first blog, I use a DCF model for valuing equities. My top 100 equities have many NG stocks. here is my top NG picks and current value estimate:
1)PDS:   50

2)CHK:   60


3)PGH:   27


4)PVX:   15


5)PDE:   30


6)BRNC:   22


7)HP:   50


8)SFY:   50


9)PDC:   40

10)ECA: 70

11)NBR   40

12)DVN: 120



10 Comments – Post Your Own

#1) On February 06, 2008 at 10:36 AM, floridabuilder2 (99.26) wrote:

i will review your picks and select 2 nat gas companies....  I need to review your modeling too... however, you are off to a remarkable start in caps, most people flounder for months trying to get where you are at..............  so do you like the caps format better????

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#2) On February 06, 2008 at 10:52 AM, bellard (99.33) wrote:

FB;

The CAPS format is the best I have seen. The game is fun, and I have been lucky - I think you would need to wait at least a year or two before making ANY judgements about a players ability to pick stocks - for good or bad...The best part of CAPS is the overall intellect of the CAPS community..

 

I would like to see your ranking of my top 10 NG plays...I would say these are longer term plays - You will need to wait 18-24 months before seeing these stock outperform the market imho..

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#3) On February 06, 2008 at 12:50 PM, AnomaLee (28.60) wrote:

Perosonally, I don't think the future for natural gas will be with power plants as much as it will be to fuel vehicles used for public transportations.

The viability for NG for power plant use should be rated as poor along with the idea of powering cars with corn-based ethanol. The increased demand for NG for power plant use outways its benefits, and since cleaner coal technologies are being developed & tested today and coal still powers most of the U.S. and the world. NG may pollute far less than other forms of energy, but it still pollutes. It's not a true "clean" form of energy.

Also, the technology for the much safer & cleaner production of nuclear is with us today in PBMR and other more efficient & cleaner technologies not being utilized. The only entry barrier for nuclear power plants has been its negative perception. The U.S. hasn't built a nuclear power plant in over 20 years, but when you consider today that nuclear waste can be reduced by over 70% and you can virtually eliminate the fear of a nuclear meltdown then the opportunity exists to power our world via nuclear technology(my secondary major). I don't think the energy sector cares that much about being green though. They do care care about viability & costs, and the nuclear technology of today seems to be the greatest route to power the grids of the world.

When it comes to NG I firmly stand by the views of T. Boone Pickens. He sees NG as a way to power vehicles, but even that moat is being challenged today with lighter quick-charge batteries that could power electric vehicles 5-10 years from now.

I do love NG. It's global demand is soaring, but unlike oil NG is very difficult & expensive to transport. It's been a great way to heat American homes and fuel stoves, but there are so many barriers to export our excess of NG that other nations don't enjoy.

I love discussions about alternative energy. Geothermal, is something rarely mentioned. It's a very viable & could relatively be the least expensive of all, but there is very little research done to improve the use geothermal energy so it could be used in hotter climates. 

Energy in general is something that is going to continue to boom as long as we keep increasing the population. As of today the increased demand for solar products outpaces all other increased demands for energy. The technologies haven't been refined and it's not near the technology of where it will be 10 years from now. As of now, there are only two solar companies I even think of actually buying (YGE, STP)

 

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#4) On February 06, 2008 at 12:54 PM, AnomaLee (28.60) wrote:

I need to start proofreading my posts....

I did want to say that I am slightly bullish on NG for the next 2 years. I don't think NG itself is a great investment, but you did throw out a damn good list of energy companies.

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#5) On February 06, 2008 at 1:27 PM, bellard (99.33) wrote:

"The increased demand for NG for power plant use outways its benefits, and since cleaner coal technologies are being developed & tested today and coal still powers most of the U.S. and the world. NG may pollute far less than other forms of energy, but it still pollutes. It's not a true "clean" form of energy."

Anomalee;

As for the above comment, I will have to disagree. NG power plants large and small are fantastic idea's IMHO. The clean coal test plant was just canceled by the energy dept because of costs. Clean coal is still being developed. the FT method, and other direct liquefaction methods for coal - all pollute more than just burning the coal, and much, much dirtier than natty gas. In the future, I think coal will be clean - but then it will cost 2-3 times more to use coal to generate electricity, and more expensive than the clean burning NG plants. Check out the small cap firm CPST - they build small, stack-able gas fired units, and GE makes the large generators...


Geothermal is a good fit, so is nuclear imho... I also agree with T. Boone Pickens opinion on NG for auto's. Never, ever bet against TB Pickens - don't agrue with him either - you will end up looking foolish...


  Thanks for discussing these energy issues! If you have a nuclear or geothermal stock play - pass it along...

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#6) On February 06, 2008 at 2:04 PM, AnomaLee (28.60) wrote:

As always the most profitable ways to play geothermal are private. I wish Vulcan Power was public. 

LSB Industries (LXU) - a very small geothermal play, but they are in everything good with geothermal and amonia/nitric chemicals. It's a growing Oklahoma microcap stock. Currently in good value. May be bought... Who knows?

The only viable way to participate in the nuclear technology I mentioned is private as well. The only way to participate with this growth is to buy their large cap partners. 

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#7) On February 07, 2008 at 6:39 PM, alstry (35.44) wrote:

A Question for the Economist:

 We have residential mortgages defaulting at record rates.  We have commercial mortgages starting to defalut.  We have residential housing values crashing.  We have commercial real estate values crashing.  We have high yield corporate debt crashing.  We have corporate investment grade spreads widening.  Today, we had 30 year treasuries fall the most in 3 years.

 Basically, on top of the BIGGEST credit bubble in American Histsory, the debt in America is defaulting at record rates, the economy is slowing rapidly(evidenced by CSCO January update and today's January retail figures), and corporations are starting to layoff to adjust to the slowing environment, bank assets are being marked to myth..........how do you think we can avoid this slowdown from converting to a systematic breakdown?

 Any insight into this is appreciated.

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#8) On February 07, 2008 at 7:56 PM, bellard (99.33) wrote:

Al;

I only answer to CAPS player with some stock picks. Just put in all the HB's and mark them underwieght - red flag...But yes the US economy is in a recession imho...Sounds like you think we are in a depression?

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#9) On February 14, 2008 at 10:22 AM, themattgrdt (99.87) wrote:

Hey bellard, welcome to CAPS. I follow your posts over on the Yahoo! AEO board and I always appreciate your insight. Good to have you!

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#10) On February 24, 2008 at 7:19 PM, jmg1313 (< 20) wrote:

If you think that vechicle trasportation is going to be a large part of natural gas I would take a quick look at SNEN.OB a chinese company.

http://www.sinoenergycorporation.com/c2458/default.asp

Sinoenergy Corporation is a leading natural gas wholesale and retail service provider as well as a manufacturer of natural gas equipment, gas vehicle conversion kits, pressure containers and non standard pressure container products. Sinoenergy focuses on the application of the “GREEN Energy” concept, and its business model ranges from natural gas compression, storage and transportation to filling station network operation, equipment design, production, technology development and service.

d service.

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