Cost is a big issue in business. If you keep costs under control, profits can become freed up. But let them rise too fast, and investors are sure to be disappointed. That's where natural gas comes into play, and it's causing wide reaching changes. Here's what you need to know about the emerging shift.
Utilities
Utilities are big natural-gas customers. Part of that is because the combination of fracking and horizontal drilling has led to a glut of the fuel and thus, low prices. That's made coal, which is cheap but dirty, less compelling. The other side of the equation, though, is that utilities are easy customers since a gas pipeline to a power plant doesn't require massive infrastructure spending.
However, the cost of natural gas is a big determinant of its use in the utility space. According to the U.S. Energy Information Administration, the average delivered cost of natural gas for utilities has gone up by more than 27% year to date. It's no wonder that utility use is down almost 15%. Interestingly, that drop is masking important changes on the industrial side of the equation, where natural gas use is up 3% year over year.
Source: EIA
Infrastructure
There's no doubt that utilities will continue to be big consumers of natural gas, but the shift in the industrial space is probably a bigger opportunity. That's because the infrastructure to deliver natural gas must be built before widespread adoption can take place.
For example, Clean Energy Fuels (CLNE 5.49%) is a money-losing company focused on integrating natural gas into the country's transportation industry. If you simply glanced at its earnings, you wouldn't touch the stock. However, it's spending to build a nationwide natural-gas fueling network for long-haul trucks. Without that infrastructure, no company would even consider a natural gas-powered fleet.
United Parcel Service (UPS +1.86%), which has a giant truck fleet, shows that views are starting to change because it believes now is the time to start looking at natural gas. Why not before? Because such trucks weren't as economically sensible until now, and natural gas wasn't as plentiful. UPS plans to buy 1,000 such long-haul trucks because, as Scott Wicker, the company's chief sustainability officer, told Bloomberg in July: "It's really the vehicles that are on the freeways that burn the most fuel."
Clean Energy believes the long-haul market is about $25 billion in size. That's huge and shows why the company has been willing to lose money to get a slice of the action. For UPS, the allure is the potential to save up to 40% on its fuel costs. Without a low-cost alternative, like coal in the utility space, that's a very low hurdle to overcome for UPS on the capital spending front and an annuity-like business opportunity for Clean Energy.
A steel resolve
Natural gas isn't just used in vehicles, either. For example, Nucor (NUE +0.95%) has been partnering with Canada's EnCana (ECA 5.18%) to lock in access to natural gas for its steel operations. The relationship began in 2010, and that initial agreement has been "exceeding the expectations that Nucor modeled" by more than 60%.
It recently went back to Encana for another deal that should provide enough natural gas to satisfy Nucor's fuel needs for two new facilities and, perhaps, another one, too -- if Nucor decides its construction is warranted. The agreements with EnCana lock in access, prices, and provide Nucor with a partner that knows how to drill for natural gas.
Slow but steady
The underlying change taking place is that the infrastructure needed to incorporate natural gas into the industrial market in a big way is slowly being built. That includes power plants, factories, fueling stations, pipelines, and vehicles, among other things. This is a slow and expensive process, but it's taking place and will eventually be a notable business.
Keep an eye on leaders in the space like UPS, Nucor, General Electric (GE +6.68%), and Clean Energy Fuels for an indication of where things are going and where the opportunities are.
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