3 Ways to Invest in Natural Gas

Natural gas has become the hottest fossil fuels play in the U.S. since the oil boom in the early 20th century. Improving shale extraction technology has lowered the costs for explorers and producers opening up a whole new set of shale reserves. And the cleaner burning fuel is attractive to everyone from utilities to trucking fleets.

If we’re going to invest in natural gas, then whom do we want to trust our money with? Here are a few of the companies you should keep your eye on in the natural gas industry.

Produce it
Adding natural gas production has been a major priority for major oil and gas companies like ExxonMobil and Chesapeake Energy (NYSE: CHK  ) . These two companies are No. 1 and No. 2 in natural gas production after ExxonMobil’s acquisition of XTO Energy last year and are sure to be leading the pack for the foreseeable future. The industry-leading standing and diverse businesses provide stability that has been lacking at some of the smaller explorers in the industry.

The major producers may not have the flair of smaller pure plays on unconventional natural gas like Quicksilver Resources (NYSE: KWK  ) and Range Resources (NYSE: RRC  ) but they provide a lot more safety. Quicksilver and Range Resources are sitting on $1.98 billion and $1.79 billion of long-term debt respectively, and with regulatory questions and local protests affecting business that’s a heavy load.

With the cost of production for unconventional natural gas falling, it’s hard to see how production won’t continue to increase putting pressure on prices. This puts producers in a tough position, especially those who don’t have the balance sheet of a multinational corporation. Production may be hot, but there are safer ways to invest in natural gas’ growth.

Move it
The flip side of falling costs and increased production is that there’s more natural gas to move. If the price of natural gas remains low it will not only remain attractive for utilities and homeowners to use for heat, it may begin opening up new fueling options.

That’s why KinderMorgan’s recent acquisition of El Paso makes so much sense. The combination creates the largest natural gas pipeline company in North America owning both regulated and unregulated assets. These pipelines can be used not only to transport natural gas for use in the U.S., but may help turn the fuel into an export.

The U.S. is producing so much natural gas that Cheniere Energy (AMEX: LNG  ) has had to expand its import terminal to include exports as well. The export facility is expected to be online in 2015 and could help grow energy exports from the U.S.

Use it
Natural gas’ biggest opportunities may be found in the new, innovative ways we will begin using the fuel.

Clean Energy Fuels (Nasdaq: CLNE  ) has built a network of fueling stations for compressed natural gas and liquefied natural gas that has grown tremendously in the last few years. Companies like UPS (NYSE: UPS  ) and third-party logistics supplier Saddle Creek are adding to their natural gas fleets and just beginning the movement into using natural gas fuel. In 10 years, you may have to make a legitimate choice between a gasoline-powered car or a new, natural gas vehicle. Companies like Westport Innovations (Nasdaq: WPRT  ) are making the technology behind that transformation happen.

Chesapeake Energy has taken notice of this fuel shift and responded by investing $150 million in Clean Energy Fuels earlier this year. The money will help build 150 liquid natural gas truck fueling stations and help build out the infrastructure needed for more widespread adoption. As that infrastructure is built, trucking fleets and buses will find the lower cost of natural gas fuel an attractive advantage helping drive a cycle of adoption.

Foolish bottom line
Natural gas’ place in our economy is likely just beginning its growth curve because of its lower emissions and abundant supply in the U.S. These companies are helping shape that future by producing, moving, and making natural gas usable.

Interested in reading more about natural gas? Add your favorite stock to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of United Parcel Service. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Chesapeake Energy, and Range Resources. 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 (7) | Recommend This Article (25)

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 October 24, 2011, at 4:40 PM, kcsag wrote:

    Why are these stocks invaluable whereas the ETF UNG has been stuck in a rut for more than 2 years. I know "contango" is partially to blame but even after a reverse split and a 40% rebound by the economy, UNG is like a falling knife. Any ideas?

  • Report this Comment On October 24, 2011, at 4:49 PM, troym72 wrote:

    What about GLNG? I'm surprised that they aren't mentioned.

  • Report this Comment On October 24, 2011, at 6:31 PM, lebaresq wrote:

    What about natural gas utilities? SJI and NFG are long-term, reliable performers

  • Report this Comment On October 24, 2011, at 8:37 PM, SUPERMANSTOCKS wrote:

    HDY is my suggestion. Now that Gaddafi is dead.

  • Report this Comment On October 24, 2011, at 8:52 PM, kayakmastr wrote:

    This article makes claims but provides little insight into the relative merits of producers, distributors, and end users. There are too many possibilities that are obvious, the issue is how to decide among them.

  • Report this Comment On October 24, 2011, at 11:20 PM, dividendgrowth wrote:

    There is a clear overcapacity in NG production, and that's very bad for producers.

    Low prices will spur consumption, and movers stand the first in line to benefit.

    Next comes consumers, chemicals and utilities are the biggest NG consumers, so watch their margins expand.

    Chemicals are especially hot since the market bottomed in March 2009. Du Pont is one of the best performing Dow component since 2007, and Buffett chased high in Lubrizol.

  • Report this Comment On October 25, 2011, at 4:31 AM, mm5525 wrote:

    +1 Good article. I own several oil/natgas MLP pipelines. We are in the salad days of some serious M&A in the pipelines. MMP, OKS, PAA, CHKM, & EPD are my best performers.

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