The difficult part of translating the future role of natural gas into investing insight is the price of natural gas. This will dictate returns on capital for drillers, its relative attractiveness, and the time line for its adoption for broader economic usage. At this point in time it appears to be winning both the real and nominal pricing relative to oil, but acting on such a conclusion would be ill advised. Science is increasingly reaching the point where solar, wind, thermal, wave, etc will become competitive.
One kicker an investment can have is the option to benefit from the "natural gassification" of the economy. The investment would have to be cheap from a valuation standpoint and be capable of generating an attractive return independent of natural gas becoming anything than it already is. To an extent, the recent write up of Pulse Data on Above Average Odds Investing fits this category.
One sector I would not look to would be drillers themselves. The shale plays are supposedly tremendous in potential, but according to Ken Peak, they will be short on investment returns. This is from an interview he did a year ago, almost to the day, with Fool.com. When asked about the company's disposal of shale assets, he responded:
The growth in natural gas shale reserves is the best thing that has happened to America in terms of energy independence in my 37-year career. The challenges with shale plays -- from Contango's perspective -- are: the large negative cumulative capital required for 3-5 years, (upfront acreage costs and dozens and dozens of wells before cumulative capital switches from being negative to being positive) in combination with 60-80% decline curves (the "Red Queen" syndrome), and the sheer manpower intensity -- hundreds of wells are required. The analogy of "manufacturing reserves" is often made to shale plays, and in truth there are some legitimate similarities, but it was never a desire of mine to be in the manufacturing business. I'll take the excitement and the disappointment of drilling high risk, high return wildcat exploration wells. In a football analogy it's like 3 yards and a cloud of dust vs. the West Coast offense -- both can be successful.Contango Oil & Gas is hell bent on being a low cost producer, because Peak realizes (and he has stated directly in the past) that in order to be a successful commodity producer, one must be the lowest cost. While high risk, high return wildcat exploration wells don't exactly make eager to be a shareholder in Contango, the high capital intensity of shale gas drilling makes it an equally unattractive environment to go searching for stocks. Yes, there can be special situations that offer value, but I've said before that I possess no real edge when it comes to analyzing energy stocks strictly speaking. The only exception being special situations with a lot of forced sellers, or hidden assets, or a non sector specific factor that makes it attractive.
As I was saying with asset management companies, the ultimate variable will come down to price. I do think that there can be a lot of embedded upside in a company that can continue to thrive in the status quo, but would just explode if natural gas makes its way into transportation fuels, a greater electricity generating role to balance out the fluctuations in solar/wind generation, or whatever else people come up with. Such investments are definitely out there, and because natural gas is so low currently and the market isn't focused on what will happen in 5-10 years, there are probably some stocks with a good margin of safety.
Talk to Andrew about investment opportunities related to natural gas
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