I have from time to time written about natural gas. I wrote about a possible upside case and then wrote some musings about looking for investments tied to natural gas. While my radar is always attuned to any opportunity, I think I have shelved the idea of finding some natural gas investment mecca. It simply doesn't suit sound investment principles to bank on far from foregone conclusions. Here are some of my thoughts/conclusions.
1. One idea I was looking at was Fuel Systems Solutions, which makes the parts for vehicles to run on natural gas. They have a $500m market cap, net cash position, and have been growing in profitability. It definitely is headed in the right direction. It has profitable operations in Europe that a) make the company a strong contender to continue to bide its time and b) give it a track record of applying its knowledge to give it a lead in convincing auto companies to include their products in large scale production. The company doesn't have a long history of profitability though and the past 4 years have seen tremendous growth. It's definitely not a very expensive stock, especially if natural gas gets adopted as a transportation fuel. Operative word is 'if.' I'm no tech guru, but what is to stop electric cars from emerging as a major player and natural gas only plays a role through electricity generation? The downside just seems too great.
2. People bandy about a lot of numbers in regard to future natural gas production. I don't want to get into numbers, mostly because I don't understand it completely, but the range is wide. It's also based on future predictions. There's plenty of upside potential in more finds and applying fracking technology outside the US, where shale plays are even more nascent. I'm not raining on the shale parade, but future predictions might be proven a stretch, as many predictions tend to be. When the US reaches the juncture of having a serious discussion about incorporating natural gas into the economy to a greater degree (hopefully its serious), the big elephant is whether or not the supplies of natural gas will justify the investment in a whole new set of infrastructure. I only say this in regard to electric vehicles vs. compressed natural gas (CNG) vehicles. There are other ways this could play out, but vehicles would embed a lot of recurring demand for natural gas that could potentially grow exponentially as a CNG based network is built out.
3. There's a lot of horse betting in the natural gas sector broadly speaking and being an average guy, its hard for to honestly believe I have an edge in the sector. Whenever I see information related to natural gas and listen to managers or various commentators, there is always some hidden agenda. The overwhelming majority of the time, its people talking their own book. Just as an example, the CEO of Chesapeak Energy was on CNBC (which is quite often) touting using natural gas as a transportation fuel. He touted how he paid the equivalent of $0.75 a gallon to fill up his CNG car. This would be expected of a CEO of a natural gas company. But what happens to that price when demand increases 5 fold? Then it isn't quite the panacea everyone thought it would be, but Chesapeake doesn't care because now it has huge recurring demand for its natural gas. When people talk their book, I ask myself if a neutral person would naturally reach the same conclusion. Investment banks would have a hard time convincing me their lobbying is for the net benefit of America. In the case of Walmart, they save people money if you ask people or Walmart. The same applies for GEICO and Progressive. Although there are plenty of other reasons, one can be more comfortable investing in a company that is fundamentally aligned with its consumers in the service/product it offers.
And as a side note, the site has surpassed 70 readers, which is a lot more people than I thought would care what I had to say about much of anything. I'm pleased with the progress I'm making as an investor, writer, and the two combined. If there's anything you find particularly interesting that you would like me to elaborate on, shoot me an email and I'll try to if it is within my circle of competence. I'm trying not to write about every stock I look at, because sometimes its in passing or gets a once over but goes on the back burner, but I enjoy writing about what I think on various market topics even if I'm not always right.
Talk to Andrew about natural gas.
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