As gas prices continue to maintain their high levels, consumers are growing tired of surrendering their hard-earned money at the pump. But a break in gasoline prices may not be on the horizon, as the U.S. already pays well below the average of a number of other developed countries around the globe. And if history is any indicator, gas prices will continue to rise until a figure like $9 per gallon is just the norm; it may sound far fetched, but it also doesn’t seem like that long ago that you could get a gallon of gas under $2. With crude oil only slated to get more expensive, it seems that many are turning towards natural gas to be the fuel of the future, as its production and use has been surging in recent years [see also 25 Ways To Invest In Natural Gas].
As an energy source, natural gas has long been useful for appliances like ovens and stove-tops among many other household products. But now, its prevalence in other industries is beginning to spread, as LNG (liquified natural gas) is becoming a viable fuel source for many automobiles. Already, the “California Energy Commission provides $12 million in annual incentives to reduce the initial cost of natural-gas vehicles, linking aid to actual reductions in carbon emissions. The commission also is conducting a $9.6 million solicitation that would add roughly 30 new or upgraded fueling stations” writes Morgan Lee.
The Natural Gas Growth Factor
According to the Energy Information Administration’s early Annual Energy Outlook report for 2012, natural gas is set to soar. The EIA cited that the jump in natural gas production will mainly stem from shale deposits, as technology increases and allows for more efficient production. The report predicts that “shale gas production [will increase] from 5.0 trillion cubic feet in 2010 (23 percent of total U.S. dry gas production) to 13.6 trillion cubic feet in 2035 (49 percent of total U.S. dry gas production)”. NG’s use, which currently accounts for roughly 23% of total electricity consumption in the country, is expected to grow to 27% by 2035 [see also Understanding Contango Through Natural Gas Futures].
Other notable predictions come on the production side of the equation, as “the United States is projected to become a net exporter of liquefied natural gas (LNG) in 2016, a net pipeline exporter in 2025, and an overall net exporter of natural gas in 2021″. This prediction is based on low costs in the U.S. and a growing demand for LNG in markets outside of North America. Adding to that fact, the report notes that LNG exports are expected to start at 1.1 billion cubic feet in 2016 and increase by an additional 1.1 billion cubic feet per day in 2019 [see also ETFs To Bet Against Natural Gas].
With all of these rosy predictions, now is certainly the time to invest in natural gas. But this begs the question, why on earth would anyone invest in an asset that has performed so poorly over the last few years? NG prices themselves have been on a downward spiral since the recession, continually sinking to new lows. But cheap prices are not necessarily a negative for all investments. For those looking for direct natural gas exposure, this article isn’t for you. Instead, we will walk through companies and funds that focus on natural gas producers and extractors who stand to gain a fair amount of ground in coming years as pipelines and productions skyrocket. While a high price for the commodity could obviously benefit these companies, low levels certainly will not dampen their growth prospects given the need for this fuel around the world [see also Beyond UNG: Three Intruiging ETFs To Play Natural Gas].
- ECA Marcellus Trust (ECT): This stock is a royalty trust which has a fair amount of potential given the current outlook for natural gas. The trust holds 14 different NG-producing firms from the Marcellus shale region, allowing it to take advantage of the coming boom in shale production. The stock has a market cap of $364 million and a handsome dividend yield of just over 11%.
- Market Vectors Unconventional Oil & Gas ETF (FRAK): FRAK is a new kind of ETF that focuses on companies involved in the unconventional production of crude oil and natural gas, a large part of which comes from shale output. The fund debuted in February of this year and has already attracted $17 million in total assets.
- Alerian MLP Index ETN (AMJ): AMJ focuses on oil and gas pipeline MLPs. While it offers the most indirect play of the three, infrastructure for the transportation of natural gas will inevitably improve and AMJ’s investment thesis will benefit from the growing miles of pipeline and the revenues that these companies bring in. This ETN has over $4 billion in assets as well as a dividend yield of 4.9% [see also Five Commodity MLPs With Sky High Yields].
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Disclosure: Long AMJ.