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Around 1000 B.C. atop Mount Parnassus in Greece, a sheepherder came across a flame leaping from a crack in a rock. The flame emitted little smoke and there was no apparent fuel -- no wood or leaves burning nearby. Assuming it was supernatural, the Greeks built the temple of the Oracle of Delphi around that fire, creating one of the most famous sites in ancient Greek history.
While that flame was hardly magical, the colorless fuel that powered it certainly ranks as one of the most important human discoveries of all time. That same mysterious gas is now one of the most valuable commodities on the planet and is quite literally powering growth all over the world. The temple at Delphi was only the first of many structures and human endeavors fueled by natural gas. The magical flame was caused by gas seeping slowly from the Earth -- a common natural phenomenon in parts of Greece. That famed temple flame was, most likely, ignited by a simple lightening strike. Gas has been put to practical use as a source of heat and light for well over 2,000 years. Five hundred years after the Oracle of Delphi was constructed, the Chinese built bamboo pipes to carry gas from similar seeps, using it to boil water and desalinate seawater. And starting in the summer of 1816, the streets of Baltimore, Maryland stopped going dark every evening; those early American streetlamps were also powered by natural gas. Nowadays the world is more dependent on natural gas than ever. Because gas burns much cleaner than coal or oil, it has become the fuel of choice in modern-day power plants. Meanwhile, many consumers rely on natural gas to power their stoves, ovens and heaters. This is not only a U.S. phenomenon -- major gas-fired power plant construction projects are underway across Europe and in fast-growing markets like India and China.
Since 1965, global consumption of natural gas has nearly quadrupled to more than 260 billion cubic feet per year. Meanwhile, crude oil consumption is up roughly 2.5 times. According to the U.S. Department of Energy (DOE), U.S. consumption of natural gas is projected to rise by nearly +40% between now and 2025. And electricity demand is growing even faster in developing markets like China and India; these countries are building gas-fired power plants to meet part of that demand. The DOE projects a more than doubling in gas demand across the emerging markets by 2025. As most homeowners are well aware, natural gas prices in the U.S. have more than doubled since late summer, recently hitting all-time highs. The reasons for that jump are simple: supply disruptions coupled with strong seasonal demand patterns. On the demand side, the winter months represent a period of peak demand for gas -- this is the so-called winter heating season. Colder parts of the country, such as the Northeast, tend to see particularly strong demand between November and March. On the supply side, this year's Gulf Coast hurricanes shut down the majority of drilling rigs and production platforms in the Gulf. And onshore, natural gas processing facilities and pipeline operations were also temporarily shuttered. Although that capacity is gradually coming back, inventories of gas in storage did not build as quickly as they usually do in September and October. As a result, natural gas supplies are smaller than normal for this time of year. Of course, these are short-term effects. Looking at the longer-term picture, the tidal wave of global gas demand is an important consideration. As global demand rises and producers struggle to keep up, gas prices are likely to rise over the long haul as well. How to Profit from Rising
Natural Gas Prices But LDCs do not provide investors with a good way to profit from higher gas demand and pricing. While you're most certainly going to pay higher bills this winter to your local LDC, none of that extra cash will find its way into the pockets of your local utility company. In fact, contrary to popular belief, higher gas prices are normally a big negative for the LDCs. The reason for this is simple: LDCs charge regulated rates for gas -- rates that are set by state and local governments. Those rates are normally made up of three separate components: a base hook-up fee, a commodity fee and a fee based on gas throughput. The base hookup fee is relatively fixed. Meanwhile the commodity fee moves up and down based on natural gas prices. And finally, the throughput fee rises and falls based on how much gas is consumed. Most LDCs do not explore for and produce their own natural gas. Instead, they buy gas from third-party producers. Thus, while your gas bill might rise due to an increase in the commodity component, most or all of that simply gets passed through to the gas producers who sell to the LDCs. Meanwhile, when natural gas prices are high, the throughput fees that LDCs earn tend to decrease due to the impact of gas conservation. The reason is simple -- when gas prices rise, consumers usually turn the thermostat lower in the winter and/or take steps to conserve energy in other ways. That leads to less energy consumed, and therefore lower throughput charges for LDCs. This is bad news for your local gas utility firm. In an effort to recoup this lost revenue, LDCs will usually apply for rate increases from their state and local governments. However, these types of requests are often denied. After all, politicians would find themselves in hot water if they voted for higher natural gas fees during periods of already sky-high gas prices. So, if LDCs don't benefit from rising natural gas prices, then who does? The firms that benefit are exploration & production (E&P) companies. These firms actually explore for natural gas reserves and sell that gas production. As such, E&P companies usually profit handsomely when natural gas prices are on the rise. Of course, there are literally hundreds of E&P companies available to investors and not all are equally good plays on rising gas prices. A few of the key factors my staff and I consider when evaluating an E&P stock include . . . Editor's Note: Throughout the remainder of this article, StreetAuthority.com founder Paul Tracy and his staff provide a closer look at the key factors to consider when investing in exploration & production (E&P) stocks. In addition, they offer up a table of several dozen high-quality E&P companies. And finally, they provide an in-depth profile of their two favorite E&P stocks, both of which are poised to benefit from rising natural gas prices. To view the remainder of this article, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue... Good investing!
Paul Tracy founded StreetAuthority and became Editor in Chief in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators. Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S. Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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Deal for Our Web Site Visitors
Simply
put: Natural gas is by far the world's fastest growing mainstream fossil
fuel. And going forward, as you can see in my chart, this trend is
likely to continue for some time to come.
