Seen as a cleaner alternative to coal and oil, natural gas is gaining traction across the United States. New horizontal drilling techniques have allowed companies to tap various shale formations, creating new sources of supplies. Utilities have begun using the fuel in spades, and Congress has proposed a new bill allowing for tax breaks on CNG-fueled cars. Receiving praise from both politicians and market pundits, and with the International Energy Agency calling for a "golden age of gas", natural gas will certainly grow as America's preferred fuel over time. Investors have flocked to funds like the Jefferies Wildcatters E&P Equities (NYSE:WCAT) to take advantage of this trend. However, without the proper infrastructure, the best-laid natural gas plans won't come to fruition. (To learn more about natural gas, check out Natural Gas Industry: An Investment Guide.)
Huge Investment Needed
There are over 528,000 kilometers (328,000 miles) of natural gas transmission and gathering pipelines. However, that won't be enough to tap the potential of America's natural gas boom. With the sources of these plentiful supplies in areas that have not historically been known for gas, such as Michigan, new pipelines and infrastructure must be built. According to a new study by ICF International, that number is about 1,400 miles of new pipelines each year. The group estimates that the United States and Canada will require a midstream natural gas investment of about $8.2 billion per year, from 2011 to 2035. This is more than double the average spent on pipeline infrastructure from 1999 to 2008. Overall, this equals about $205.2 billion in total infrastructure spending on just natural gas in order to take advantage of that full potential.
Analysts are Bullish On the Global Market for Natural Gas
The ICF study projects that natural gas consumption in the United States and Canada will increase by an average 1.6% per year through 2035. However, analysts are bullish on the global market for natural gas. The International Energy Agency (IEA) estimates that global consumption of natural gas will rise by more than 50% over the next 25 years. The United States' vast supplies could also be a major source of exports via liquefied natural gas (LNG). Over the next 30 years, the IEA predicts that this growth will require a $250 billion investment in liquefaction plants, coastal re-gasification import terminals and special tankers. Recently, Cheniere Energy (NYSE:LNG) won approval to build an LNG export facility in Louisiana. Cheniere estimates that it will cost over $6 billion to build the new infrastructure for the plant. (To gain a better understanding of reading gas and oil reports, see Understanding Oil Industry Terminology.)
Pipelines, Picks & Shovels
For America's natural gas revolution to continue, much in the way of new infrastructure must be built. While not all areas will require new pipelines, most will require new investment to connect these new supplies to markets. For investors, that spells a huge opportunity. While the First Trust ISE-Revere Natural Gas Index (NYSE:FCG) is a popular play on the theme, investors may want to look at those companies that focus on the infrastructure side of natural gas. Here are a few picks.
Construction company MasTec (NYSE:MTZ) recently purchased Fabcor, a Canadian pipeline and facility construction services company. The deal puts MasTec in touch with Canadian natural gas producers such as EnCana (NYSE:ECA) and Canadian Natural Resources (NYSE:CNQ). Similarly, investors can look at pipeline specialist Willbros Group (NYSE:WG).
For investors who wish to profit from owning these pipelines, the UBS E-TRACS Alerian Natural Gas MLP ETN (Nasdaq:MLPG) tracks 15 of the largest pipeline and storage companies related to natural gas, including Williams Partners (NYSE:WPZ). The ETN yields a healthy 5.6%.
Finally, all of this new infrastructure activity will require greater amounts of steel. Tenaris SA (NYSE:TS) remains the oil and gas industry's go-to supplier for a variety of drilling pipes. In addition, the company manufactures large-diameter pipe for gathering and trunk lines in the natural gas sector.
America's love affair with natural gas is just beginning. However, without the proper infrastructure in place, much of the potential is lost. Billions of dollars and thousands of miles worth of pipelines will need to be spent and built to take advantage of this. Stocks like KBR (NYSE:KBR) will continue to benefit as the build-out continues. (For more, check out Uncovering Oil And Gas Futures.)
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