The Graph Every Energy Investor Needs to See

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There's one graph that does more to show why natural gas producers such as Devon Energy (NYSE: DVN  ) and Chesapeake Energy (NYSE: CHK  ) have a bright future than all the other blogs around. It's Vaclav Smil's graph of the year, which was predominantly featured at The Washington Post's famous Wonkblog on Dec. 29.

The graph charts prices for crude oil and natural gas, and it shows why natural gas will be the energy source of choice for the foreseeable future. As you can see from the graph, natural gas prices have been steadily falling for the last four years, while crude oil costs have risen.

Source: The Washington Post

The story the graph tells is a simple one: In 2008 crude oil costs hit a high of around $140 a barrel. The spot price for natural gas also hit a high in that year of around $13 per thousand cubic feet. The prices for both energy sources then took a dramatic nosedive during the great financial meltdown.

Natural gas prices going down, down, down
Yet as the graph shows, something interesting has been happening since then. The natural gas spot price has been going down steadily with the exception of a small peak in early 2010. Oil prices have been creeping up and are now back around $110 a barrel. The natural gas spot price at the end of 2013 was around $2 per mcf.

The lesson for investors is that natural gas is not only cheaper than crude oil, it is probably going to get cheaper in the near future. We all know what happens when something gets cheaper: We use more of it, and the volume of sales increases.

History has proven again and again that the best way to make a lot of money is to sell something at a discount. The discount drives the volume of sales, which leads to increasing revenue. Wal-Mart and are two companies that have followed this age-old formula.

Is natural gas discount energy?
Natural gas has just become the discount energy source, which means demand will increase. If these trends continue, natural gas will become competitive as a fuel source for vehicles. Chrysler and Ford are already planning to bring out natural-gas powered trucks next year. It could also become highly competitive for such uses as fuel cells for the micro generation of electricity.

Obviously, this is highly speculative because the infrastructure for natural-gas powered vehicles and micro generation of electricity doesn't exist yet. It'll cost a lot of money to develop a network of natural gas filling stations and to install natural gas-powered fuel cells or generators in homes and businesses. It'll also require people to change their thinking, which can be harder than the work of installing the physical infrastructure.

Yet the low price of natural gas could make such moves very economical in the near future. We also know that consumers are willing to radically change their habits if something is a lot cheaper. Just take a look at all of the consumers who buy groceries at Wal-Mart.

Bottom line
If this trend continues, companies like Devon, Chesapeake, EOG Resources (NYSE: EOG  ) , Apache, and Chevron, which are sitting on huge reserves of natural gas, could see a massive increase in revenues. This revenue increase has already begun for some companies: Chesapeake's revenue increased by nearly $6 billion between September 2011 and September 2013.

Competitor EOG Resources saw its revenue grow by more than $4 billion in the same period. The revenue for oil-centered producers such as Marathon Oil and Apache stayed flat in the same period.

The chart of the year shows that the natural gas boom is real and likely to continue. Energy investors need to take a hard look at it before making their stock picks for 2014. 

America's energy boom is far from over
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Read/Post Comments (1) | Recommend This Article (2)

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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 January 09, 2014, at 4:59 PM, leasehound wrote:

    Uh, the spot price for natural gas at the end of 2013 was closer to $4.31 per mcf, and crude oil (WTI) closed today around 92.39 per barrel. EOG saw its revenue grow from 2011 to 2013 primarily because of oil and NGL production, not natural gas.

    Unfortunately, many shale gas wells are not economic at $4.00/mcf, and no shale gas well is economic at $2.00/mcf. If the price continues to drop, as the author suggests, it will cost more to produce the gas than it is worth, and while demand will increase, the E&P companies (natural gas producers) will experience huge losses, and will be forced to write down their assets.

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Daniel Jennings

Daniel G. Jennings is a professional writer with a strong interest in stocks. He's an old school value investor who thinks that Benjamin Graham was right.

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