3 Different Ways to Profit From Natural Gas

U.S. natural gas production is projected to increase through 2040. Here are three ways to profit from this growing business.

May 13, 2014 at 9:17AM

The Energy Information Administration projects U.S. natural gas production will grow through 2040. Given the demand for natural gas by petrochemical companies and utilities, not to mention buyers from abroad, there's money to be made in this business. Natural gas producers obviously profit from all this production, but there are other ways to make a buck off of America's natural gas. Here are three examples.

Liquefied natural gas carrier
Thanks to the nuclear reactor disaster at Fukushima, Japan in addition to Russian President Vladimir Putin's forays into Ukraine, delivering natural gas by boat looks like a true growth industry. GasLog (NYSE:GLOG) owns or operates 20 liquefied natural gas, or LNG, carriers, with seven more on the way. This represents almost twice as many ships as GasLog owned or operated at its IPO in April 2012.

The past year saw revenue and earnings grow enviably. Compared to fiscal year 2012, GasLog's 2013 earnings increased from $0.18 a share to $0.62 per share on revenue of more than $157 million compared to $68.5 million in 2012. Not surprisingly, the stock went from slightly less than $13 a share 12 months ago to its current price of around $26 a share today. The 1.7% dividend yield is a financial cherry on top.

Will the good times keep rolling? All signs say yes. LNG imports by Asian countries continue growing with China building more import terminals to handle growing demand. Chinese LNG imports alone grew 77% over the past year, and there's no sign of slacking demand. Growing natural gas production in the U.S., Australia, Angola, and other countries should keep GasLog's carriers fully chartered for years.

Natural gas-burning engines
A benefit of using natural gas as engine fuel is the reduction in cost and emissions relative to diesel. Customers of Power Solutions International (NASDAQ:PSIX) seem to understand this, given Power Solutions' latest earnings report. For fiscal year 2013, sales and operating income increased 18% and 30%, respectively. Adjusted earnings per share increased from $0.21 in 2012 to $0.24 in 2013. The company reported a net loss due to non-cash charges related to a revaluation of stock warrants.

Power Solutions offers a variety of engines using natural gas as a fuel. Such applications include forklifts and garbage trucks as well as long-haul and local delivery trucks. One good thing about Power Solutions is that it designs and builds its engines. Another good thing is that it sells its engines in China as well as the U.S. In fact, the company reports the demand for natural gas-burning engines in China will triple between 2012 and 2015. 

So what does the future hold? Clean air regulations. These include emission regulations for interstate trucking and the burning of natural gas at oil production sites (so-called "flaring"). Cleaner burning engines and reduced flaring will drive demand for the engines and generators made by Power Solutions. Growing demand for natural gas engines in China will also push revenue higher. For 2014, the company projects a 30% increase in sales over 2013.

Moving gas across America
Perhaps one of the safest energy-related investments is in midstream companies. It doesn't matter who produces the natural gas; it has to get from the field to the customer somehow. Williams Companies (NYSE:WMB) operates pipelines getting natural gas from such prolific fields as the Marcellus and Utica to customers along the Atlantic and Gulf coasts. Williams also operates pipelines in the Pacific Northwest that connect to gas fields in the Rocky Mountains -- which is not to downplay the Canadian pipeline and related operations in Canada.

Williams operates a system of collecting so-called offgas produced from oil sands operations in Alberta. The gas is processed to remove the butane, propane, and other natural gas liquids. The liquids are sold across North America while the natural gas itself is returned to the oil sands operations to be used as fuel.

The most recent earnings announcement revealed a quarterly profit of $0.20 a share, down from the first quarter of 2013 but up from the third quarter of 2013. The company currently plans 14 expansion projects in the U.S. and Canada that should help drive earnings and dividends in the future.

The current dividend yields 3.7%.

Final Foolish thoughts
Risk is proportional to reward, and natural gas investments are no exception. GasLog offers significant growth potential, but the stock has already grown and may be particularly vulnerable to any earnings disappointments. Power Solutions is less risky with its diversity in engine offerings and growth potential in China, but it also has seen significant stock gains. Williams offers investors the safety of a large midstream company with exposure to natural gas exports from all three American coasts. While not likely to grow like GasLog, it does offer safety and a growing dividend.

More ways to profit from America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Robert Zimmerman owns shares of Williams Company. The Motley Fool has no position in any of the stocks mentioned. 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.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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