Friday, August 01, 2008 10:55:06 AM
Natural Gas: Booming In The Beltway
Andrew T. Gillies and Brian Wingfield 08.01.08, 6:00 AM ET
Washington, D.C. - The natural gas industry has been turning up the heat this summer in the nation's capital. Advocates are explaining to lawmakers that while oil is expensive, scarce and imported, there's enough natural gas in the U.S. supply to last more than 100 years.
One example: Aubrey McClendon, Forbes 400 member and chief executive of Chesapeake Energy (nyse: CHK - news - people ), the second-largest independent producer of natural gas in the country. Speaking at a Congress hearing Wednesday, he sounded more like someone in the business of political snake oil.
"Imagine if tomorrow you could announce a new energy plan that would in one stroke cut your constituent's gasoline bill in half, reduce our oil imports, improve our air quality, enhance national security, strengthen the dollar, reduce greenhouse gas emissions and create tens of thousands of new jobs in the U.S," McClendon said. "I believe your upcoming reelection chances would be even higher than they already are."
Smooth. McClendon and other panelists at the hearing, convened by the House Select Committee on Energy Independence and Global Warming, want Congress to know that natural gas can have a more prominent role in America's energy future.
Several lawmakers seemed convinced, describing natural gas as "a precious resource," a bridge to a renewable energy future--and a replacement for coal.
Some are already on the bandwagon. Earlier this month, Reps. Rahm Emanuel, D-Ill., and Dan Boren, D-Okla., introduced a bill that aims to have 10% of all vehicles in the U.S. by 2018 powered by natural gas. In addition to providing tax credits for producers and consumers, it would require gas stations owned by Big Oil to install at least one natural gas pump.
Also this week, the American Clean Skies Foundation (ACSF)--a pro-natural gas think tank founded by McClendon--and Navigant Consulting (nyse: NCI - news - people ) released a study showing that the U.S. domestic supply of natural gas is above official government estimates. The reason? Modern technology has made it possible to draw natural gas from shale formations spread across the country.
The public relations campaign for natural gas is already on a roll. In April, the ACSF started an online video channel, CleanSkies.tv, devoted to clean energy, particularly natural gas. In September, Chesapeake will soon launch Shale.tv, another video site devoted to natural gas drilling. And billionaire investor T. Boone Pickens, now touting wind energy as a fix for electricity generation, favors natural gas as a way to alleviate the transportation sector's dependence on oil.
Investors in natural gas stocks may want to use the bullish Beltway outlook as an opportunity to do some buying.
Of course, the natural gas business, like any energy commodity, is marked by boom and bust. Where do things stand now? September 2008 gas futures have dropped 32% since a high of $13.65 per million British thermal units in early July. But even with the drop, prices are high. In October of 2002, the September 2008 contract bottomed at $3.60 per million Btu.
We can't predict whether natural gas prices will hold up, but we can report that witness comments at Wednesday's congressional hearing suggested demand would likely remain brisk. Rich Wells, vice president for energy at Dow Chemical (nyse: DOW - news - people ), told representatives that the spike in natural gas had led to a quadrupling since 2002 of his company's energy and feedstock costs (natural gas is used to make 3,000 of Dow's products) to a projected $32 billion in 2008.
"We are concerned that adding new uses to natural gas, such as in transportation, will create new and relatively inelastic demand that we cannot meet without high prices," he warned.
A fellow panelist gave reason for Wells to worry. John German, manager for environmental and energy analysis at Honda Motor (nyse: HMC - news - people ), described his company's pioneering development of natural gas passenger vehicles and how that development might bloom. With Plug Power (nasdaq: PLUG - news - people ), he mentioned, Honda is testing a home fueling unit that can generate hydrogen from natural gas, an important step in development of hydrogen fuel cell vehicles.
Another spur for demand could be the global warming issue, namely the adoption of a cap-and-trade regime to contain carbon emissions. "There will be a huge incentive for utilities that generate electricity from coal to convert to natural gas," said ranking Republican member James Sensenbrenner of Wisconsin. "That's going to increase the demand for natural gas and put pressure on prices."
Nonetheless, McClendon likes what he sees on the supply side.
"I think there will be plenty of supply to meet the demand from our and all the other industries," he told Forbes.com in an interview. There are more than 22 shale basins in 20 states, he says, and with recent improvements in drilling technology, those basins are more accessible than ever.
According to the Navigant/ACSF study, natural gas production from unconventional sources, such as shale, has increased nearly 65% within the last decade. McClendon says the Haynesville shale formation in Louisiana and Texas holds serious potential.
And what about price volatility due to hurricanes and other factors? McClendon says the days of being concerned that hurricanes will damage the infrastructure for natural gas are "pretty much over." In 2005, when Hurricane Katrina caused a spike in natural gas prices, about 25% of U.S. natural gas was produced offshore, McClendon says. Today, it's about 15%.
If you like the supply-demand profile--and the Beltway goodwill--consider the natural gas stocks in the accompanying table. We started with a universe of 389 natural gas producers listed on U.S. exchanges. We narrowed that group with a few requirements: market values and trailing-twelve-month revenues greater than $100, as well as positive net income and excess cash flow (cash from operations minus capital expenditures and dividends paid) in positive territory. We also tossed companies where long-term debt exceeded 50% of total capital.
This bunch trades, on average, at just eight times analyst forecasts on per-share profits for the coming year. Looking out over the next three to five years; analysts expect profits to increase at an average of 15% annualized.
http://www.forbes.com/2008/07/31/natural-gas-congress-biz-energy-cx_bw_atg_0801gas.html?partner=alerts
Andrew T. Gillies and Brian Wingfield 08.01.08, 6:00 AM ET
Washington, D.C. - The natural gas industry has been turning up the heat this summer in the nation's capital. Advocates are explaining to lawmakers that while oil is expensive, scarce and imported, there's enough natural gas in the U.S. supply to last more than 100 years.
One example: Aubrey McClendon, Forbes 400 member and chief executive of Chesapeake Energy (nyse: CHK - news - people ), the second-largest independent producer of natural gas in the country. Speaking at a Congress hearing Wednesday, he sounded more like someone in the business of political snake oil.
"Imagine if tomorrow you could announce a new energy plan that would in one stroke cut your constituent's gasoline bill in half, reduce our oil imports, improve our air quality, enhance national security, strengthen the dollar, reduce greenhouse gas emissions and create tens of thousands of new jobs in the U.S," McClendon said. "I believe your upcoming reelection chances would be even higher than they already are."
Smooth. McClendon and other panelists at the hearing, convened by the House Select Committee on Energy Independence and Global Warming, want Congress to know that natural gas can have a more prominent role in America's energy future.
Several lawmakers seemed convinced, describing natural gas as "a precious resource," a bridge to a renewable energy future--and a replacement for coal.
Some are already on the bandwagon. Earlier this month, Reps. Rahm Emanuel, D-Ill., and Dan Boren, D-Okla., introduced a bill that aims to have 10% of all vehicles in the U.S. by 2018 powered by natural gas. In addition to providing tax credits for producers and consumers, it would require gas stations owned by Big Oil to install at least one natural gas pump.
Also this week, the American Clean Skies Foundation (ACSF)--a pro-natural gas think tank founded by McClendon--and Navigant Consulting (nyse: NCI - news - people ) released a study showing that the U.S. domestic supply of natural gas is above official government estimates. The reason? Modern technology has made it possible to draw natural gas from shale formations spread across the country.
The public relations campaign for natural gas is already on a roll. In April, the ACSF started an online video channel, CleanSkies.tv, devoted to clean energy, particularly natural gas. In September, Chesapeake will soon launch Shale.tv, another video site devoted to natural gas drilling. And billionaire investor T. Boone Pickens, now touting wind energy as a fix for electricity generation, favors natural gas as a way to alleviate the transportation sector's dependence on oil.
Investors in natural gas stocks may want to use the bullish Beltway outlook as an opportunity to do some buying.
Of course, the natural gas business, like any energy commodity, is marked by boom and bust. Where do things stand now? September 2008 gas futures have dropped 32% since a high of $13.65 per million British thermal units in early July. But even with the drop, prices are high. In October of 2002, the September 2008 contract bottomed at $3.60 per million Btu.
We can't predict whether natural gas prices will hold up, but we can report that witness comments at Wednesday's congressional hearing suggested demand would likely remain brisk. Rich Wells, vice president for energy at Dow Chemical (nyse: DOW - news - people ), told representatives that the spike in natural gas had led to a quadrupling since 2002 of his company's energy and feedstock costs (natural gas is used to make 3,000 of Dow's products) to a projected $32 billion in 2008.
"We are concerned that adding new uses to natural gas, such as in transportation, will create new and relatively inelastic demand that we cannot meet without high prices," he warned.
A fellow panelist gave reason for Wells to worry. John German, manager for environmental and energy analysis at Honda Motor (nyse: HMC - news - people ), described his company's pioneering development of natural gas passenger vehicles and how that development might bloom. With Plug Power (nasdaq: PLUG - news - people ), he mentioned, Honda is testing a home fueling unit that can generate hydrogen from natural gas, an important step in development of hydrogen fuel cell vehicles.
Another spur for demand could be the global warming issue, namely the adoption of a cap-and-trade regime to contain carbon emissions. "There will be a huge incentive for utilities that generate electricity from coal to convert to natural gas," said ranking Republican member James Sensenbrenner of Wisconsin. "That's going to increase the demand for natural gas and put pressure on prices."
Nonetheless, McClendon likes what he sees on the supply side.
"I think there will be plenty of supply to meet the demand from our and all the other industries," he told Forbes.com in an interview. There are more than 22 shale basins in 20 states, he says, and with recent improvements in drilling technology, those basins are more accessible than ever.
According to the Navigant/ACSF study, natural gas production from unconventional sources, such as shale, has increased nearly 65% within the last decade. McClendon says the Haynesville shale formation in Louisiana and Texas holds serious potential.
And what about price volatility due to hurricanes and other factors? McClendon says the days of being concerned that hurricanes will damage the infrastructure for natural gas are "pretty much over." In 2005, when Hurricane Katrina caused a spike in natural gas prices, about 25% of U.S. natural gas was produced offshore, McClendon says. Today, it's about 15%.
If you like the supply-demand profile--and the Beltway goodwill--consider the natural gas stocks in the accompanying table. We started with a universe of 389 natural gas producers listed on U.S. exchanges. We narrowed that group with a few requirements: market values and trailing-twelve-month revenues greater than $100, as well as positive net income and excess cash flow (cash from operations minus capital expenditures and dividends paid) in positive territory. We also tossed companies where long-term debt exceeded 50% of total capital.
This bunch trades, on average, at just eight times analyst forecasts on per-share profits for the coming year. Looking out over the next three to five years; analysts expect profits to increase at an average of 15% annualized.
http://www.forbes.com/2008/07/31/natural-gas-congress-biz-energy-cx_bw_atg_0801gas.html?partner=alerts
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