Since November, the market price for natural gas has dropped by about 30%. At the moment, this makes much of the natural gas producted in the USA a losing proposition, and it has taken a severe toll on the stock of natural gas companies. For example, Chesapeake Energy Corp. stock has fallen by about 25% during this time, and stock in Range Resources has fallen by 28%. Both of these companies remain profitable. For example, Range Resources has already sold the majority of it production at much higher prices on the futures market and it enjoys an all-in cost of production which would still keep it highly profitable even at current market prices. But, clearly, the natural gas companies have been hit by the price decline in a major way.
Looking forward, there is no indication that the price for gas will recover much. The winter has been warmer than usual so far, so gas usage is down. Production, on the other hand, continues to roll in, and most storage facilities are full. Drilling for natural gas has declined with more activity going to the much pricier oil. But drilling has certainly not stopped. Too many companies have leases that require them to drill in order to keep the lease for there to be a total fall off in drilling activity. Further, much of the gas that gets produced comes from oil wells or wet gas areas that remain highly profitable due to the elevated price for oil. So the likelihood of a severe drop in gas supply is not great; these low prices should be with us for quite some time.
This raises the question as to how one can profit from the drop in natural gas prices. My answer is to purchase stock in Clean Energy Fuels Corp. (symbol CLNE). Clean Energy constructs and operates fueling stations for natural gas powered vehicles. It was growing rapidly all during 2011, principally on the strength of truck and bus fleets converting to natural gas. Clean Energy is also building a network of natural gas filling stations on interstate highways across the nation, thereby providing the infrastructure needed so that long distance truckers can make the switch to natural gas. More than half of that network is expected to be completed by the end of 2012. The company also is building individual stations at many other locations, and it operates in-house fueling points for a variety of trucking and bus fleets. It also has some intriguing prospects. For example, Clean Energy is the provider of natural gas fuel to UPS for its natural gas powered trucks in the demonstration project in Southern California.
The simple truth about the drop in natural gas prices is this: it takes the cost advatage that natural gas powered vehicles had over diesel or gasoline powered ones and expands it greatly. Particularly since it looks like the lower prices will be here for quite some time, the advantage for natural gas in powering vehicles should put a great deal more force into the switch to such vehicles. Clean Energy should benefit greatly as the numbers of trucks, buses and even cars powered by natural gas grows. And do not discount cars in this calculation. Some cities have approved natural gas taxis for use. Maybe New York City will order the entire taxi fleet to convert to natural gas in the next five years. The point is that once there are more places to fill up such a car, there will be more Americans who will want to buy one. That means more will be made, and the need for still more filling stations will grow.
Clean Energy still remains a so-called story stock. It is not profitable yet, and it is unlikely to be profitable in 2012. It is still building its network of stations, so that is the current focus of the company. It will be 2013 or 2014 before the company's investment really begins to pay off. Even as a story stock, however, Clean Energy certainly has one extremely good story. Think of it this way: the stock currently sells for $13.35 per share. Where do you think it will go if UPS announces a major conversion of its fleet to natural gas with Clean Energy selected to install and operate even half of the new fueling locations? In 2011, UPS spent just under four billion dollars on fuel, an increase of about 800 million dollars over 2010 due to the rise in gasoline and diesel prices. A switch to natural gas power would have meant substantial savings for that company; while the exact number is hard to know, a full conversion would result in at least one billion dollars in savings. That could increase UPS earnings by 25% or more. In other words, the pressure to switch to natural gas is great and it is growing.
Clean Energy remains a speculative investment, so it is not a place to park the mortgage money or even your child's college fund. It is, however, a very good place for that portion of your portfolio that you set aside for more risky investments which have the possibility of a great reward.
UPDATE -- Just an hour or so after this post first went up, Drudge linked to a story about how the summer of 2012 is likely to see gasoline prices at over $5 per gallon. Diesel will necessarily follow that price rise too. That will make the spread between the fuel for oil powered behicles and that for natural gas powered vehicles even more dramatic.
DISCLOSURE: I am long Clean Energy.
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