Natural Gas

Photo credit: Flickr/Derrick Coetzee

Natural gas is on pace to displace coal as the world's second favorite fuel by 2040. According to the nation's No. 1 natural gas producer, ExxonMobil (NYSE:XOM), natural gas demand is expected to grow by 65% over the next 30 years. That means the cleaner-burning fuel would provide about 25% of the world's energy by 2040. That presents a pretty compelling future opportunity for investors.

Demand for natural gas is expected to come from a deeper penetration in electrical generation, which has it directly displacing coal. In addition, natural gas is expected to become more prevalent as a transportation fuel as well as a feedstock for the petrochemical industry. While that will surely benefit Exxon and the nation's No. 2 producer, Chesapeake Energy (NYSE:CHK), over the long term, these might not be the best long-term plays on natural gas.

Right now, both Chesapeake and Exxon are focused on drilling for more profitable oil. Not only has Chesapeake cut its gas-focused capex from 70% in 2010 to just 13% this year, it has also cut its total capex from more than $13 billion to just over $7 billion. While that's still a lot of money, Chesapeake's focus is clearly off natural gas.

The same can't be said for companies such as Range Resources (NYSE:RRC) and CONSOL Energy (NYSE:CNX). Both see tremendous natural gas production growth over the long term. In Range's case, it has line-of-sight production growth in the range of 20%-25% for the next few years. Because of its low cost structure, it can produce high rates of return even at current gas prices. For example, at current prices it can produce a 97% internal rate of return on its Marcellus wells. For some perspective on that number, EOG Resources (NYSE:EOG) currently enjoys an after-tax rate of return on an oil-rich Bakken shale well or a liquids-rich Eagle Ford shell well of around 100%. Bottom line, for a low-cost producer like Range, natural gas is very profitable. 

In the case of CONSOL, it has taken its focus off coal. Instead, it will be focusing all of its growth capital spending on natural gas once it completes its BMX mine expansion next year. That will enable the company to accelerate its natural gas production growth, which is expected to jump to a 22%-30% growth rate in 2014. That's after rather flat production from 2011 to 2012. Clearly, CONSOL can see that coal's reign is nearing an end, which is why it's now backing the fuel that is taking its spot.

For investors, there are a lot of potential profits to be made as natural gas becomes the world's second most important energy source. Companies such as Range and CONSOL are getting into position now to profit from its rise. That should lead to outsized long-term gains for investors as the world's demand for gas increases over the coming years.

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Range Resources and has options on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.