The Coming Golden Age for These Energy Stocks

Oil prices get the flashy headlines, but natural gas will steal the show. That's what a recent report from the International Energy Agency suggests. Investors still have time to get in and ride this wave.

The IEA believes we could be on the brink of a golden age of gas, where consumption of natural gas would soar by some 50% over the next quarter-century, as China, Germany, the U.S., and other large economies shift their energy use increasingly to gas. So which stocks should you buy to benefit from this shift? 

I drink your milkshake, sir
With oil near $100 a barrel and a limited ability to quickly increase supply, economies across the world are looking for cheaper and more plentiful energy sources. Enter natural gas. IEA reports that the world contains enough gas resources to maintain current production for more than 250 years.

New drilling technology called hydraulic fracturing, or fracking, has enabled the extraction of natural gas from shale rock. That technology has allowed natural gas players such as Chesapeake Energy (NYSE: CHK  ) to rapidly increase production in places like the Marcellus shale in Pennsylvania and New York and the Haynesville shale in Louisiana and Texas. In fact, the Haynesville has been estimated to be the largest natural gas field in the contiguous United States.

Some of the biggest players are already positioning themselves while prices are still cheap. ExxonMobil (NYSE: XOM  ) acquired natural gas player XTO Energy in 2009 for $41 billion. That acquisition moved Exxon into clearer contention with Chesapeake and Southwestern Energy in the unconventional natural gas business. Norway-based Statoil (NYSE: STO  ) has also undertaken a deal with Chesapeake to gain exposure to the U.S. gas market. The IEA estimates that the next quarter-century will see "40% of the growth in total gas production will come from unconventional gas," according to The Wall Street Journal.

But gas is also attractive for at least three other reasons.

  • While oil reserves are highly concentrated in politically unstable regions, natural gas reserves are more dispersed geographically, making gas more suitable for energy security.
  • The recent nuclear event in Japan has raised awareness of the dangers of nuclear energy, prompting some players such as Germany to eliminate nuclear energy and switch to gas.
  • China is already putting strains on oil supplies and is expected to drive the proliferation of gas, too. Cleaner-burning gas is expected to replace coal in the nation's power plants.

Despite these favorable long-term trends, there still looks to be short-term pain for natural gas producers.

Everyone is barreling into oil now
Because oil prices are so much higher than gas prices, it's still much more profitable to drill for oil than gas. And energy explorers can use the same technologies to drill for either. All that means you should see a shift in productive resources from gas to oil, as companies seek to maximize their short-term profits.

Even gas giants such as Chesapeake are moving into oil because of the price disparity between oil and gas. For example, Sandridge Energy (NYSE: SD  ) snapped up Arena Resources in 2010 for its oil reserves. All else equal, the shift will help push the prices of oil down and gas up. It's estimated that gas prices could rise to at least $6/mcf from their current level of $4.80 and that would still leave plenty of opportunity for explorers to exploit the price differential between gas and oil, if oil remained at current prices.

So even while many energy players scramble for short-term profits on oil, gas looks like an increasingly compelling long-term play. As my Foolish colleague Dan Dzombak explains, you want to be buying commodities such as gas when they're cheap and blood is in the streets. That's what Exxon did a couple years ago with its purchase of XTO, but there's still time to act since oil prices sit at historically high prices relative to gas.

Where to play it
The safest way to play any commodity is to buy the low-cost provider. In the case of natural gas that means Ultra Petroleum (NYSE: UPL  ) . Its costs are significantly below those of even Southwestern Energy, whose production price is also below current gas prices.

America's cheap natural gas has also opened the opportunity for export to the rest of the world. Companies such as Cheniere Energy (AMEX: LNG  ) and its subsidiary Cheniere Energy Partners (AMEX: CQP  ) are hoping to take advantage by opening LNG export facilities on the Gulf of Mexico. The parent recently raised funds via a secondary offering, and the Department of Energy has given the company approval to export LNG to any nonembargoed country. With the approval, the company will expand its LNG operations, although gas won't ship from the expanded location until 2015.

A sticky wicket
Even as it suggested that gas was entering a golden age, the IEA warned that concerns over fracking had the potential to derail the development of gas as an alternative to oil. Critics have contended that fracking contaminates drinking water and fouls natural habitats. And explorers have refused to reveal the ingredients in their fracking solutions, making the public even more wary of the process, cheap energy or not. Given that this concern is gaining wider awareness, unconventional gas plays may not get off the ground.

Fortunately, there's one stock that investors can turn to. Regardless of whether we use gas or oil to meet our energy needs, we'll use the following company. Click here to get the name of that company in our special free report "The One Energy Stock You'll Ever Need."

Jim Royal, Ph.D., does not own shares of any company mentioned. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Statoil and Chesapeake Energy. Motley Fool newsletter services have recommended writing puts in Southwestern Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (77)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 07, 2011, at 4:31 PM, DonGrayPeyto wrote:

    I agree 100% with the author, that if you are going to invest in a natural gas weighted company, you should choose one with a low cost structure. Ultra has been an excellent natural gas explorer and developer over the past decade. An alternative to Ultra would be Peyto Exploration & Development Corp., a company that I founded in 1998. Peyto is recognized as one of North America's most successful engery companies over the past decade. Peyto specializes in finding and developing natural gas in Western Canada's Deep Basin. I believe Peyto currently has the lowest cost structure of any producer in North America at $0.39/mcfe, yes even lower than UPL (please correct me if I have this wrong). Another attribute that Peyto has in it's favor is growth. Since Q1 2010 Peyto has grown production by 32% per share. Peyto currently operates 98% of its production. Peyto has a relatively very long reserve and producing life. I would humbly recommend that investors interested in natural gas find out more about Peyto by going to www.peyto.com. The Peyto presentation is meant to be very transparent and informative. We also have an insider trading summary on our website that has trading history back to 2001.

    For the record, I'm Chairman of the Board of Peyto and I'm a shareholder of Peyto.

  • Report this Comment On June 07, 2011, at 4:55 PM, 123spot wrote:

    Gasfrac (Canadian GSFVF) is fracking using propane gel instead of water, recapturing the gasified propane and recycling it. No water hauling or pollution. I think new technologies like this and others being developed may make natural gas more environmentally safer to extract.

    Disclosure- own a very small number of Gasfrac shares just to make myself follow new developments that may influence NatGas.

  • Report this Comment On June 07, 2011, at 4:56 PM, 123spot wrote:

    *safe, not "safer"

  • Report this Comment On June 07, 2011, at 5:36 PM, zmann62 wrote:

    Anaerobic digester's have been around for years used mostly on dairy farm and mostly home made.

    GE is building the worlds largest plant in China Google manure to methane and read about all the different plants using all types of animal waste including human

    Plants are coming on line monthly.

    The great thing about this process is it solves two problems at once less energy dependence from a totally renewable source (we all contribute) and an environmental problem is negated

    Fracking is not the answer unless you want your water supply contaminated

  • Report this Comment On June 07, 2011, at 6:51 PM, dickfool74 wrote:

    Dear Motley bunch:

    You're a bit behind the curve but heading in the right direction with Natgas.

    Also, Chesapeake is changing...they've got the Chinese as partners, and they're entire outfit is merging with a fracking outfit out of Texas...yet to be completed.

    Check out "the Bakken" (and three Forks), which is the biggest play in ND, MT and Canada. That's where horizontal and hydraulic fracking was proved up and going large.

    And a hint....just like GasFrac (I've owned for over a year) will solve drilling/fracking problems with new technology, the future big hits will be companies that "supply" the eventual shift to natgas. The carriers, the high-tech new methods to get that next 10-20 % of existing product out of old wells, and the merging/buying of the smaller players with good assets.

  • Report this Comment On June 07, 2011, at 6:55 PM, Darwood11 wrote:

    Good article.

    When XOM purchased XTO, there were a lot of nay sayers that said it was about the end of "big oil." I own XOM (1% more than my index funds) and I think it was a shrewd move.

    I'd suggest that we keep an eye on the 20 year horizon. That's what I attempt to do.

  • Report this Comment On June 07, 2011, at 7:23 PM, budro2201 wrote:

    I'm not familiar with the technology used to liquify natural gas so that it can be shipped as LNG. Is there one or more dominant companies that produce the equipment used for LNG and, if so, would they be additional long-term plays in this arena?

  • Report this Comment On June 07, 2011, at 9:01 PM, TheDumbMoney wrote:

    @Darwood11. Wise, I think!

    General note to all: just wait 'til Exxon starts installing natural gas refueling capability at gas stations on major truck routes on freeways, and then expands it. I absolutely think it will happen within five years. I'd love to see many cars running natural gas within ten years, and I think it could happen. Honda has already shown the technology exists with its natural gas civic. We just don't have the infrastructure yet. A company like Exxon could really go a long way to change that.

    General note two: natrual gas is not a global commodity market the way oil is. It is priced higher in Europe in part because companies like Gazprom price it with reference to oil, that's how it has historically been done. In North America it is priced only with reference to itself. This presents the opportunity and also the risk in LNG production in this country, I think. Opportunity because there is a natural arbitrage opportunity, do to the European and Asian pricing anomolies. Risk because if that changes, it could change the economics of LNG facilities here.

  • Report this Comment On June 07, 2011, at 9:39 PM, TMFBreakerRob wrote:

    Just to be a bit of a wet blanket.......cheap gas prices could stay cheap for quite a while. Making an investment under the assumption that gas price increases over the next couple years are "likely" or "probable" is a risky game....lots of people have been burned playing it over the last couple years.

    Good luck! :)

  • Report this Comment On June 07, 2011, at 10:53 PM, jimmy4040 wrote:

    It's an ok idea, but way too soon.

    Also in terms of making money, this:

    " •While oil reserves are highly concentrated in politically unstable regions, natural gas reserves are more dispersed geographically, making gas more suitable for energy security."

    is a negative, not a positive.

    Why do you think there's aren't any coal futures billionaires? Like nat gas it's widely found and usually in stable, market oriented countries. That's bad news for the type of wild price swings that make investors big money.

    If you invest in a major oil company, you get the nat gas essentially thrown in for free. Investing in any other type of concentrated nat gas stock is just dead money for quite some years to come.

  • Report this Comment On June 07, 2011, at 11:08 PM, DBLBLU wrote:

    One company that you might want to check out is Carbon Sciences. They are about to start producing samples of diesel fuel from natural gas and carbon dioxide. The longer term goal is to produce gasoline using the same process.

    The process CABND developed produces "syngas" which is then fed into a Fischer-Tropsch gas-to-liquid process. FT has been around for decades and is a proven technology. The challenge has been producing the syngas economically.

    This is a very speculative investment but if they do prove to have a viable technology and can get the funding to keep going, they could turn the middle east upside down.

    Full disclosure..I have patiently (foolishly?) owned shares of Carbon Sciences for almost a year-and-a-half.

  • Report this Comment On June 08, 2011, at 12:43 AM, Howard1ii wrote:

    How about all these companies that get the gas from the well to our doors? Pipeline operators like AGL, SO, EPD, etc. Seems to me if demand is going to increase they are positioned for growth.

  • Report this Comment On June 08, 2011, at 1:15 AM, Pat4Ra wrote:

    So which is the best pure natural gas player now? Thanks!

  • Report this Comment On June 08, 2011, at 12:22 PM, susan400 wrote:

    gascos won't release fracing chems? false

    look it up

    .

    Massive su-pply ahread in ngas,

    you want to bbuy that or short it?

    Exxon didn't buy XTO cheap ,, they paid a record proice.

    winners are transporyters of thse big new voumes in yres ahead.

  • Report this Comment On June 08, 2011, at 2:00 PM, 2112Brian wrote:

    I think the energy business is going to change in the near future. One of the companies that could do this is EEStor. This is one of Kleiner Perkins big investments. If EEStor is real it could change the world.

  • Report this Comment On June 08, 2011, at 4:20 PM, TheDumbMoney wrote:

    @susan400. In what sense do you mean 'record'? On a $/mcf basis, Exxon got an amazing deal. And that's not including the management and expertise that it bought, or any unproved reserves of oil or gas it uncovers.

    General Note, and re: @TMFBreakerRob: As for me personally, I looked into this, and while the macro story is great here, it seems to me that the advantages are likely priced into a stock like UPL already, especially given that the natural gas market is not going to see a big change for at least a year or two. The fact is, 1) we have a sh!tload of supply in North America; 2) political reality means fracking opposition will have only limited effect (so supply will not greatly decrease), and new technologies and upcoming regulations are already making it safer; 3) we are years away from massive LNG exports as far as I know; 4) we are years away from common use of natural gas in cars and trucks; 5) in terms of powerplants, hugely greater natural gas usage is years away, due to a combination of competitive factors and practical building/permitting concerns.

    So the reality is, if (like Exxon) your view on this is a thirty-year view, now is a great time to buy. If you think you're going to make a boatload in the next year or three, you probably need some gas let out of your balloon.

    There is more than a tinge of "everybody is looking for the next great commodity speculation" to this article. My own guess is that the next great commodity speculation will be something that ends with the suffix "-ium," and which is neither as useful nor as scarce as everyone will suddenly decide it is.

  • Report this Comment On June 09, 2011, at 9:21 PM, pruffin wrote:

    Interesting discussion. Fracking is not the answer but if there's $ to be made an environmentally safe extraction method will be developed. All I know is that my father-in-law in rural southern Poland is driving a converted 20 yr old Renault that runs on LNG and it costs half what diesel costs (there). And there are stations everywhere. I believe only Utah has a distribution network but dumberthanafool's observation about Exxons' possible build out of natgas refueling network suggests natgas for cars and trucks may be near.

  • Report this Comment On June 10, 2011, at 1:03 PM, cjjcarter wrote:

    Susan400 was the only contributor that spelled fracing correctly, so I guess that she does know about fracing. The fact is that almost every well drilled in the last 50 years was fraced. If fracing pollutes ground water, there would not be any clean ground water in most of the states in the U S.

    I think that the technology to keep informed about is the liquefaction of natural gas. If this can be prefected, it will solve the problem of having pressurized natural gas as the fuel in autos. I don't know how you avoid the possibility of an explosion in an accident otherwise.

  • Report this Comment On June 10, 2011, at 1:05 PM, gcmagone wrote:

    EOG Resourses (EOG) will get you both oil and gas acreage in the Eagle Ford and Bakken. It is not a cheap stock be any means but, they have the reserves where it counts.

  • Report this Comment On June 13, 2011, at 6:14 PM, Darwood11 wrote:

    @TMFBreakerRob. <i> Making an investment under the assumption that gas price increases over the next couple years are "likely" or "probable" is a risky game. </i>

    I agree. For one to two year investments I look toward companies like NFLX. Disclaimer: I own this stock.

    I think technology is one of those areas where there are many opportunities for relatively "short term" profits, until the next "disruptor" arrives on the scene. I'd be very cautious about making a long term (20 year) technology investment. In energy, there are some nascent technologies, but no "game changers" given the voracious appetite of the basic, electricity and fossil fuel driven world market.

  • Report this Comment On June 14, 2011, at 8:47 PM, clamcake1 wrote:

    the reason why we do not have a significant number of natural gas vehicles on the road is simply due to the fact that it is not politicall desireable. Did you know that Honda, has a filling kit that can be installed at your home by a ;licensed plumber? If this is done you will be able to fill up with the cleanest burning fuel currently available. Of course the state and or federal government would not be able to collect a tax on the fuel and thus the reason it is not readily available. No doubt the same liberal politicians preventing availability of this option are the very ones proposing a 1. gallon a tax to subsidize alternative fuels. You see, the don't mind gasoline or diesel fuel rising a dollar a gallon they are simply out of joint becaluse they did not grab the dollar a gallon increase before someone else did.

  • Report this Comment On June 16, 2011, at 2:02 PM, mm5525 wrote:

    Consider the MLP newly IPO'd of CHK last summer..... CHKM (Chesapeake Midstream Partners). At least you get a nice yield, and they also have partnerships with other companies other than CHK (obviously they're the GP to CHKM) to soften the exposure to the more volatile CHK itself. I realize I'm talking my own book as a CHKM long, but I'd much rather own CHKM than CHK itself.

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