Investing in natural gas.

The American energy profile is changing and, unless the Obama administration does something to mess it up, there will inevitably be a major move towards natural gas as the energy of choice. The market forces are simply too great for the change to not take hold, so the question arises as to how one can invest to best take advantage of this. My answer is to focus on companies in the Marcellus shale play and further on service companies like GasFrac Energy Service that fill a particular need in the field.

In order to understand why the Marcellus is the place to be, you need to consider certain key facts. First, the Marcellus is located in the Northeast, so gas from this field is less expensive to transport to the markets in that area. Second, the wells in the Marcellus have, for the moment, the lowest cost per unit of gas produced in the country. Third, even though the Marcellus production has been growing rapidly for a few years now, the major oil companies are still hanging back waiting to see if the gas produced there remains economical. Right now, petroleum is rought five times more expensive than an amount of natural gas that produces the same energy. When the uncertain outlook for natural gas prices firms up, the majors will be rushing in to try to grab reserves in the Marcellus.

So which E&P companies in the Marcellus do I recommend? My first choice is Range Resources (symbol RRC). Range is second in Marcellus based production behing Chesapeake Energy(symbol CHK). Chesapeake, however, has assets all over the country including a mix of gas and oil production. Range Resources has focused on the Marcellus; it has even sold off its other assets in order to put all of its investments into the Marcellus. If the Marcellus takes off, Range Resources will fly high enough to go into orbit.

My second choice in the Marcellus is Rexx Energy (symbol REXX). Rexx is a much smaller company, but it too is focused on the Marcellus. Range Resources has the advantage over Rexx that the RRC wells have more natural gas liquids in them. Nevertheless, Rexx has the potential to do quite well once the Marcellus takes off.

The service companies that I like include two in particular: Gasfrac Energy Services (symbol GFS:ca or GSFVF on the pin sheets) and Penn Virginia Resource Partners (symbol PVR). PVR is bulding natural gas pipeline systems in the Marcellus that ought to have a major positive
effect on earnings in the next twelve months. The bulk of the company is either involved with managing coal mines or pipeline operations that are not in the Marcellus, but the increased earnings that should come from the Marcellus should be sufficient to move the stock. While you wait, you can collect a hefty dividend of about 7.5%.

Gasfrac is a stock about which I have ofter written. At the moment, Gasfrac does no work in the Marcellus, so why do I include it here? Gasfrac has the answer to all of the environmental issues raised by the opponents of hydraulic fracturing, the process that makes the development of the Marcellus possible. It is growing at the moment so rapidly that the only thing holding GasFrac back is the amount of equipment it can have built to do the work and the number of people it can train to carry out the jobs.

At some point in the near future, Congress will take up the NAT GAS act. That law would provide major incentives for people to switch from gasoline to natural gas to power vehicles. It would also promote the construction of filling stations capable of servicing cars powered by nat gas. Unlike the nonsense thrown about Washington with regard to electric cars, a move to natural gas is inevitable since it is a move that makes economic sense as well as environmental sense. Look at it this way: the utility companies that generate electric power in America have mover their power plants so that only about 1% of all electricity comes from oil fired facilities. Nearly a quarter of all electric power now comes from natural gas powered facilities. The same thing will happen for vehicles once the initial logjam is broken.

Buyng a basket of the stocks mentioned above should pay off well in the next 12 to 18 months.

Disclosure: I am long all of the stocks mentioned in this article. Natural gas is one of my heaviest concentrations.

Note: As usual, you should do your own due dilligence before investing in any of these companies. Keep in mind also, that the movement in these stocks is not one for the short term. There will be ups and downs. As the natural gas industry develops the Marcellus, however, the upward motion should take over.