With the abundance of shale formations across the United States, natural gas is being touted by a variety of market pundits and government officials as a way to wean our addiction off of foreign oil. New, refined drilling techniques have allowed exploration and production (E&P) firm's access to the trapped natural gas contained within these rocks for the first time. The fuel source has already gained prominence from an electricity generation standpoint, as many utilities have switched over to natural gas, and have begun construction on new gas-run power plants. Despite the appeal of natural gas, using it as a propulsion fuel hasn't caught on just yet. But, "the times they are-a-changin'," and for forward thinking investors this shift could mean big profits.
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New Domestic Bills and Global Growth While all-electric vehicles and plug-in hybrid vehicles (PHEV) like
Tesla Motors' (Nasdaq:
TSLA) new roadster, have gained in popularity with the public, natural gas powered automobiles have yet to gain steam. However, recent initiatives by various members of government could push the fuel source forward. Most recently, the governors of Colorado, Oklahoma, Pennsylvania and Wyoming are creating a collation to encourage U.S. automakers to develop affordable vehicles that run on the fuel. The plan is centered on replacing their state fleet vehicles with ones that run on natural gas. Their hope is that this will drive demand for more filling stations and cars that run on the alternative fuel. This echoes movements made by the federal government. In a rare showing of bipartisanship, Congress has proposed the New Alternative Transportation to Give Americans Solutions of 2011, or the NatGas Act 2011. (For related reading, see
What Determines Oil Prices?)
But, investors may not need to wait for the U.S. to get its act together on natural gas powered cars. According to data by the International Association for Natural Gas Vehicles (IANGV), there are currently more than 12.6 million natural gas vehicles (NGV) throughout the globe.
Emerging markets in Asia and Latin American have embraced the fuel source for transportation. In Asia, NGVs have experienced an average annual growth rate of about 42% over the last 10 years with China alone, boasting more than 450,000 vehicles. Overall, the IANGV's target is that there will be 65 million natural gas powered vehicle globally by 2020.
How to Play the Shift
With some big named fleet operators like
Waste Management (NYSE:
WM) already making the shift towards natural gas, investors may want to consider playing this trend. The
First Trust ISE-Revere Natural Gas index (ARCA:
FCG) has been cited time and time again as a great way to hone in on the E&P firms associated with natural gas drilling. The funds' 31 holdings, along with the futures based
Teucrium Natural Gas ETF (ARCA:
NAGS), should continue to do well as the roll-out gains steam.
Operating more than 238 natural gas fueling stations across the nation,
Clean Energy Fuels (Nasdaq:
CLNE) could be the prominent play in NGVs. The firm recently beat analyst's estimates for
earnings, but continues to struggle on profitability. But, with
Chesapeake Energy's (NYSE:
CHK) recent backing and a record number of fuel stations and contracts currently in the works, the firm may have finally hit critical mass and turn a profit. For a side bet on CLNE's growth, investors may want to look at
Emerson Electric (NYSE:
EMR). The firms Micro Motion CNG050 Compressed Natural Gas meters go into almost every NGV pump. (For related reading on natural gas, see
Natural Gas Industry: An Investment Guide.)
Finally, two equipment producers could be a great play as well. Both
Fuel Systems Solution (Nasdaq:
FSYS) and
Westport Innovations (Nasdaq:
WPRT) produce components that enable internal combustion engines to run on gaseous alternative fuels, such as propane, natural gas and hydrogen. Both firms could be big winners as more automakers start ramping up NGV production.
The Bottom Line While natural gas usage by utilities for electricity generation has increased steadily over the last few years, its use as a transportation fuel hasn't been so great. However, that could change with a variety of new initiatives being set forth by state and national governments. For investors, betting on the switch could mean big portfolio gains.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
