Remember that really fun Polar Vortex last winter? While the biting cold likely wasn't fun for many, it was especially bitter for New Englanders. Northerly residents and businesses may be used to the occasional cold front, but nothing could prepare them from the shock of opening a heating bill last winter. When Henry Hub prices (the oft-quoted benchmark for American natural gas) spiked over $6 per MMbtu in February 2014, natural gas delivered to the Algonquin Citygate Hub in Boston soared to $80 per MMbtu!
The price spikes were caused by a lack of pipelines in New England, which resulted in severe supply bottlenecks, despite being located just several hundred miles east of America's most productive shale basin. Although temperatures this winter have been milder than the record lows set last year, the region remains vulnerable to supply volatility. That creates some interesting opportunities for Renewable Energy Group (NASDAQ:REGI), Clean Energy Fuels (NASDAQ:CLNE), and Kinder Morgan Energy Partners LP (UNKNOWN:KMP.DL) -- all of which are tackling the issue with a different approach.
Approach 1: Build pipelines (duh)
Kinder Morgan (who else?) has plans in place to build a nearly 150-mile natural-gas pipeline that will begin just outside Albany, New York, cut through northwestern Massachusetts, head north into New Hampshire for 70 miles, then cut south and head back into Massachusetts before ending in Dracut, which is 33 miles north of Boston. Two existing pipelines in the region have a mirror-image path; starting near Albany before heading into southwestern Massachusetts and gradually making their way toward Boston.
In other words, the company's proposed pipeline would alleviate much of the current supply issues facing New England by servicing towns currently untouched by natural gas. It would also allow cheap natural gas to flow to new gas-fired power plants in the nation's most expensive electricity market. Kinder Morgan expects to begin construction in 2017 and open the pipeline in 2018. But the obvious solution isn't so easy.
Building a pipeline through heavily populated towns increases the costs, which are expected to total several billion dollars. In an attempt to avoid disturbances to as many communities in the pipeline's path as possible, Kinder Morgan has proposed that the pipeline follow a regional transmission line. Although it has yet to hammer any deal with the owner, pairing transmission lines with pipelines is common practice in the industry.
Several activist environmental groups in Massachusetts and New Hampshire aren't impressed with the new route and have already begun organizing to protest the pipeline. However, New England residents must be more realistic about their limited power options after similar groups played a role in pressuring regional coal and nuclear facilities to close. Like it or not, everything can't be powered by wind and solar energy (yet).
While I find it difficult to believe that decision makers will reject Kinder Morgan's proposed natural-gas pipeline, I wouldn't be surprised to see the project delayed by protests or lawsuits, either.
Approach 2: Supply natural gas without pipelines
You know what they say, "If you can't build 'em, compress natural gas into a liquid and bring it to their front doors!" (or something like that). That's what Clean Energy Fuels plans to do with its newly acquired stake in NG Advantage, which is expanding its virtual pipeline throughout New England. It may seem odd that a company traditionally associated with heavy-duty trucking is suddenly plunging into the heating business, but it makes perfect sense.
The idea is to use refueling stations owned by Clean Energy Fuels to fill heavy-duty tankers, deliver the compressed natural gas to industrial customers, and offload the cargo onsite for use in heating applications ranging from comfort (during cold months) to process-related needs (year-round at a paper mill, for instance). It has been popular in New England among businesses that do not have access to a natural-gas pipeline and have therefore been forced to use more expensive and dirtier coal or fuel oil.
The virtual pipeline began adding to the top and bottom lines for Clean Energy Fuels in the fourth quarter of 2014, but despite its growth potential, recent energy developments could present some near-term hurdles. Consider that the company acquires much of its natural gas from regional pipelines exposed to the supply volatility that is central to this article. That means the price customers pay goes up with the regional price for natural gas.
There's another factor that may only be relevant in 2015. When crude oil prices fell, they took diesel and heating-fuel oil prices with them. So New England businesses and residents that rely on heating-fuel oil will be paying considerably less this year than at any point in recent memory, which could make them hesitant to switch to new systems with long-term benefits for at least another year.
Approach 3: Keep supplying fuel oil
Well, if you cannot build pipelines or compete with low heating-fuel oil prices, then maybe you should just supply fuel oil. And once again, you'll have to turn to a company traditionally associated with transportation fuels. Renewable Energy Group may be the largest biodiesel producer in the country, but it has diversified its core business with REG Marketing & Logistics, REG Life Sciences (synthetic biology), REG Synthetic Fuels (renewable hydrocarbons), and REG Energy Services (fuel oil).
While it's true that fuel-oil consumption in New England is likely to decline from the current 300,000-plus barrels per day as natural-gas pipelines are built, recent legislation is expected to drive growth for a select few suppliers. Nearly every state in the Northeast has adopted strict new standards on the maximum sulfur content to be allowed in heating-fuel oil, which kick-in by winter 2018 at the latest, and only allow ultralow sulfur diesel, or ULSD, to be used.
That's great news for Renewable Energy Group, which sells ULSD and biodiesel-blended heating oil from its seven terminals in the the region, and could also work against the argument from Clean Energy Fuels that natural gas is substantially cleaner than fuel oil. But there are some obstacles to growth. Although falling prices are great for customers, they can weigh on margins of suppliers. Lower average selling prices across its diesel-focused portfolio have been a thorn in Renewable Energy Group's side in recent quarters. The company barely managed to squeak out profits in 2014 (without government subsidies), but things could get interesting with greatly subdued prices in the months ahead.
What does it mean for investors?
There are plenty of potential options for alleviating New England's natural-gas shortages and diversifying supply. Unfortunately, as is often the case, there is no overnight solution. Kinder Morgan may have the upper hand in the long term, but it could take more time and money than is currently expected to build new pipelines. Clean Energy Fuels can leverage existing infrastructure in the meantime, although the natural gas price spikes affect the virtual pipeline, too. And while Renewable Energy Group can get a boost from upcoming ULSD requirements, it must contend with falling selling prices and declining consumption of heating-fuel oil.
In other words, I wouldn't invest in any of these companies solely for their plans to bring winter-time relief to New England, although they're all worth a deeper look when considering their broader businesses. Let's just hope we never see another Polar Vortex anytime soon.