Fuel of the Future?
Hint: It's a gas, baby

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (Dec. 21, 1998) -- From day one of our current study of the energy industry, we have paid special attention to refer to the companies we are discussing as "oil and gas companies," rather than just plain-old "oil companies." This may seem like splitting hairs a little, but in our opinion the inclusion of the natural gas business in our analysis is very important.
For some reason, natural gas always plays second fiddle to its better-known sibling, oil. Like Marcia Brady, oil always seems to get all of the attention, and poor Jan (natural gas) is left to sulk and wonder why. Perhaps this phenomenon is due to the images that oil conjures in most folks' minds. Think gushing oil wells, supertankers, and Texas millionaires in big ten-gallon hats. Conversely, what kind of images come to mind when someone says "gas"?

On second thought, maybe you should keep those images to yourself.

Natural gas may be neglected in some forums, but not here. In fact, the long-term outlook for natural gas may be even more promising from an investing standpoint than the outlook for oil. As John S. Herold Inc. energy analyst Lysle Brinker stated in a recent interview, "[O]ver the long term, there's plentiful gas, and as much as hydrocarbons are going to help fulfill the global energy needs, gas will be a part of that, and increasingly so."

So oil lovers, put that in your pipeline and smoke it!

According to the American Gas Association, natural gas makes up about a quarter of total U.S. energy consumption, second behind oil's 40% share. If transportation fuels are taken out of the equation, then gas represents a third of the total energy consumed in the U.S. About 87% of the gas used in the U.S. is also produced in the U.S. (most of the remaining 13% comes from Canada, eh.) And according to estimates, there is at least a 65-year supply of gas still sitting beneath U.S. soil, based on today's production levels. So, this business is not going to disappear anytime soon.

The fact that the U.S. is more or less natural gas self-reliant may make gas more attractive than oil as a basis for a long-term investment. Today, the U.S. has to import about half of the oil it uses to sustain its day-to-day needs, opening the oil investor up to all kinds of secondary, international-related risks. With a natural gas "pure play" company (or even an E&P company highly-leveraged toward gas), OPEC, international political considerations, and the global oil supply-demand balance can be pretty much tossed out the investment analysis window. Dropping those factors lessens our qualitative analysis load considerably.

Of course, the U.S. does not have a hammerlock on the world's gas production. We only produce about a quarter of the world's gas, so there is a chance that as our consumption of the fuel increases, we may have to import it from elsewhere if our "home-grown" supply cannot keep up with demand. Remember, the U.S. used to be oil self-reliant once upon a time as well, back around the time when Ronald Reagan was best known as an actor who worked well with chimps.

On the demand side of the equation, gas demand has increased by about 35% since 1986 and is expected to jump by another 35% by 2015, according to the AGA. That may seem impressive, but it works out to a less than breathtaking 1.7% compound annual growth rate for added demand, which the AGA suggests will be met by new U.S. gas supplies over our 19-year investment timespan.

We instinctively tend to identify oil with the gasoline used in automobiles, even though it has many different applications. Natural gas, on the other hand, makes up less than 3% of the auto fuel market. Its primary use is for residential home heating, keeping 53% of the homes in the U.S. toasty warm. Gas is also replacing oil as the fuel of choice for new electric power plants, due partly to its "cleaner" environmental nature. While no combustible fossil fuel is completely friendly to the environment, burning gas produces about 30% less of the greenhouse gas carbon dioxide than burning oil. Sounds like a smart way to go from our novice environmentalist point of view.

In this sense, we may want to be less "car-centric" when thinking about oil and gas companies as potential investments. It's easy for Jeff and myself to think from this vantage point, since we're bums and don't own a car between us (An examination of an industry more relevant to our daily lives -- shoe leather companies -- is in the Drip Port hopper.) For others, however, identifying Mobil or BP without thinking of gasoline may be as difficult as trying to picture Don King without the hair.

Jeff will likely have more to say about natural gas and our country's vast pipeline network when he examines the "downstream" refining, transportation, and marketing activities of oil and gas companies later this week (This is another way of saying that I've run out of things to say. It's also a not-so-subtle hint for our overseas amigo to keep this gas discussion going.) Until then, feel free to discuss the merits of oil versus natural gas on the Drip Companies message board

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12/21/98 Close
Stock Close Change JNJ 77 -2 1/2 INTC 122 11/16 +2 11/16 CPB 54 -1 15/16 MEL 67 3/4 +3/4
Day Month Year History Drip (0.39%) 3.54% 32.14% 12.53% S&P 500 1.25% 3.36% 23.95% 26.44% Nasdaq 2.49% 9.67% 36.15% 34.14% Last Rec'd Total # Security In At Current 11/02/98 8.055 CPB $52.880 $54.000 09/01/98 9.727 INTC $80.238 $122.688 11/09/98 8.578 JNJ $74.090 $77.000 10/07/98 1.000 MEL $48.560 $67.750 Last Rec'd Total # Security In At Value Change 11/02/98 8.055 CPB $425.95 $434.97 $9.02 09/01/98 9.727 INTC $780.50 $1193.42 $412.92 11/09/98 8.578 JNJ $635.55 $660.51 $24.96 10/07/98 1.000 MEL $48.56 $67.75 $19.19 Base: $2200.00 Cash: $262.88** Total: $2619.53

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The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
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