The Other Natural Gas Boom

Growing natural gas consumption fueled by low prices paints a future of clean electricity with reduced emissions. While the electrical power sector is a very important consumer of natural gas, the industrial sector is also a substantial and growing consumer. Natural gas producers benefit from the industrial sector's stable and growing demand in the face of utilities switching between coal and natural gas. 

US Natural Gas Industrial Consumption Chart

US Natural Gas Industrial Consumption data by YCharts

The above chart shows how America's consumption of natural gas has changed. The important point is that for a number of years industrial consumption is almost equal to power sector consumption. Even taking in account growing demand, the Energy Information Agency expects that by 2040 industry's consumption of natural gas will be higher than power generation's consumption. 

In 2013 the power sector's natural gas demand has fallen off a bit thanks to higher natural gas prices encouraging utilities to switch back to coal. At the same time industrial users are making big investments that will increase their consumption of natural gas. European demand for diesel is growing, but European refiners lack access to cheap U.S. natural gas that is being used to help produce diesel. In the face of the falling spreads between U.S. crude and international crude, U.S. refiners can invest in hydrocrakers for a more sustainable advantage over their European competitors.

Valero (NYSE: VLO  ) has recently installed new hydrocraking units that let it use natural gas to help increase diesel production, and it has further plans to expand production. The company's consumption of natural gas already reaches 700 million cubic feet per day (mmcf/day) at full utilization. Greater use of cheap natural gas will help Valero make up for the 41.04% drop in profits it expects to see this year compared to 2012.

Valero is not the only company bringing new natural gas consuming hydrocrakers online. Marathon Petroleum  (NYSE: MPC  ) is evaluating a new hydrocracker unit in its Garyville facility. Investors are probably more excited over its recently approved $2 billion share repurchase, but the fact that Marathon has real capex projects on the table shows that it has opportunities for organic growth. Its 2013 earnings are expected to come in 44.7% below its 2012 earnings, making organic growth critical.

What does this mean for natural gas producers?
ExxonMobil (NYSE: XOM  ) is a big natural gas producer and refiner, allowing it profit on both sides. Its upstream operations benefit from stronger pricing, and its downstream operations benefit by re-calibrating refineries to consume more cheap U.S. natural gas. In Q3 2013 alone it upstream operations produced 10,914 mmcf/day of natural gas for sale.

Its refinery operations are growing. ExxonMobil has already filed for the permits to expand its Texan Baytown plant and take advantage of its nearby natural gas production. These investments will help counteract the $1.126 billion fall in earnings its U.S. downstream operations saw between Q3 2012 to Q3 2013.

Chesapeake Energy (NYSE: CHK  ) is trying to up its oil and natural gas liquids production, but its natural gas production in Q3 2013 was still 3,000 mmcf/day. In this recent quarter its liquids production was only 27% of total production. Chesapeake is not an integrated producer like ExxonMobil, but regardless growing industrial consumption of natural gas will still help Chesapeake's bottom line.

Chesapeake's debt load is very large with a total debt-to-equity ratio of 0.97. Strong natural gas prices will help the company retire or refinance the $4.3 billion in debt it has coming due in 2017. 

Final thoughts
Low natural gas prices provide a big boost to U.S. industry. While utilities' consumption of natural gas can be volatile due to the availability of domestic coal supplies, big refiners like Valero, Marathon Petroleum, and ExxonMobil are making big investments to increase margins and permanently boost their refineries' natural gas intake. Producers like Chesapeake still suffer from high debt loads, but sustainable natural gas demand growth makes its heavy debt load bearable for the time being.

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9/23/2016 4:00 PM
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