Remember the natural gas revolution?
In April 2012, natural gas prices hit historic lows under $2 per million British thermal units (mmBtu) after a long decline, driven by the fracking boom. Stocks positioned to benefit from a mass conversion to natural gas soared. Shares of natural gas engine-designer Westport Innovations (NASDAQ: WPRT ) nearly doubled in four months as did Clean Energy Fuels (NASDAQ: CLNE ) , which builds natural gas fueling stations.
Congress was poised to pass the NAT GAS Act, a bill that would give subsidies to vehicles using alternative fuels. President Obama was touting the benefits of alternative energy from a homegrown source , devising plans to provide $1 billion for natural gas infrastructure. A world where natural gas vehicles were competing with gasoline-powered seemed to be right on the horizon.
Fast forward 18 months, and these visions seem like just a hazy fantasy. Natural gas prices are nearly double what they were back then, topping $4 back in the spring. No legislation ever came out of Congress to encourage the adoption of natural gas vehicles, and stocks like Westport and Clean Energy have flat-lined, losing nearly half their value from those peaks.
The $2/mmBtu price tag proved to be unsustainable for producers, who finally managed to cut back production, and prices seem to have found an equilibrium near $4. And while fuel stocks have tumbled, other industry players such as natural gas exporters have been on the rise as $4 is still significantly lower than prices in Europe and Asia. Most notably is Cheniere Energy (NYSEMKT: LNG ) whose shares have more than doubled since last spring as the company makes headway on its conversion of the Sabine Pass LNG terminal to outfit it for exports. The facility is expected to come on line by 2015.
One crucial component from the NAT GAS bill had been to keep all domestically extracted gas within the country, but the country clearly seems to be on the opposite path now . In fact, yesterday, shares of Dominion Resources (NYSE: D ) hit an all-time high after the company received approval from the Department of Energy to export natural gas to countries outside of US free-trade zones . Dominion plans to begin reconfiguring its Cove Point facility in Maryland next year with completion targeted for 2017.
With the approval, Dominion becomes the fourth LNG exporter, joining Freeport LNG and Lake Charles Exports , a joint venture between Energy Transfer Partners and BG Group. We could see many more energy companies follow suit as Secretary of Energy Ernest Moniz has vowed to examine a dozen other similar requests this year .
Where do we go now?
18 months after natural gas prices bottomed out, the window of opportunity seems to be closing for natural gas fueling companies like Westport and Clean Energy. Low prices attract attention, and gas prices seem set to float upward once exports begin with Cheniere in 2015. The Obama administration has already allowed permitting for 6.37 billion cubic feet of LNG to be exported daily, nearly 10% of US production , and more could soon be on the way considering new Secretary Moniz's promise to render a decision on a dozen more requests by year's end.
The revolution will not be televised
Congress never passed the natural gas act, but the Obama administration has been active elsewhere on the legislative front, cracking down on the coal-fired power plants, and favoring a switch to cleaner, cheaper natural gas. The Environmental Protection Agency is now advocating laws that would require any new coal plant to install expensive carbon-capturing technology, which would hasten the demise of coal and increase demand for natural gas .
Fuel for natural gas trucks is about 20% cheaper today than traditional options, but a small change in the supply/demand equilibrium could eliminate that advantage.
Last fall, Westport dramatically cut back its guidance, so much so that it's seeing declining revenue this year, blaming the cut on customers' decisions to delay orders and cut inventory due to a lack of fueling infrastructure . Other beneficiaries of the production boom such as exporters and utilities don't suffer from this chicken-and-egg problem.
Natural gas adoption should grow for the short-haul fleets that already use it, but don't expect it to displace the long-haul trucks and other vehicles that rely on diesel and gasoline. Currently there are about 120,000 conventional filling stations compared to only about 1,000 for natural gas , and companies like Tesla are making a case for the viability of the electric car, leapfrogging fossil fuel vehicles.
With major changes afoot in the industry, the natural gas revolution may be upon us, but don't expect to see it on the highway.
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