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Three Ways to Profit from Cheap Natural Gas (revised)

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One of my favorite teachers used to tell me that “there is opportunity in everything.”  This is especially true in the stock market; as money leaves one asset, it flows somewhere else.  In the case of natural gas, its exceptionally low price has been driving other investments slowly but surely higher; let me share with you where the money seems to be flowing…

As we explore the potential benefactors, I want to take you back a couple years.  Perhaps it was elementary or middle school when you first learned the laws governing matter and energy.  Coincidentally, they actually apply (at least loosely) to the markets and I thought it would be appropriate to offer those analogies here. 

 1.      Conservation of Matter (Energy) - Everything Must Go Somewhere 
The first law of energy and matter tells us that nothing really disappears, it simply moves elsewhere.  In the stock market, when a stock is sold, the proceeds flow into someone’s bank account and the costs out of another’s.

With natural gas, the losses (on price) that are being taken by investors, drillers and speculators are flowing into the hands of companies that are using natural gas to run their factories or generators.  Utility companies like Calpine (CPN) and ONEOK (OKE - Free Report) burn (to generate electricity), distribute and market natural gas to the masses and may benefit from lower price natural gas due to lower input costs, but stable retail delivery prices to the consumer.  Out of all the ways to play cheap natural gas, these types of companies will most likely benefit the least.

Staying on the theme of moving matter, the next group to consider are the distribution companies.  With natural gas being inexpensive, demand should rise and volumes increase, which should be a major motivator for these stocks.  A distribution company like Enterprise Products Partners (EPD), an MLP, provides processing and transportation services for producers of Natural Gas Liquids (NGLs).

2.      You Can't Get Something for Nothing
This law reminds me of the old saying on the trading floor “there’s no such thing as a free lunch.” As an investor you must remember that you can’t have return without risk.  The more you want to make, the more risk you will have to take -- period.

To generate energy and get your car moving, you need input.  That could be a push, an engine or even a steep hill; because free energy is impossible.   To power our lives, we need to pour gas into our fuel tanks, fill up our propane containers or harness the natural gas that flows into our homes.

The issue is that we “get” our energy from countries that may not think too highly of us, not to mention they control the cost of that energy to an extent and thus the cost of our locomotion and progress as Americans.

The companies that can get natural gas out of the ground and distribute it at the lowest cost possible to wanting consumers will benefit from the natural gas revolution that is quietly occurring.  Chesapeake Energy (CHK - Free Report) is North America’s second largest nat gas producer and one of the largest private land owners in America.

But perhaps more importantly, they recently partnered with GE to deploy more than 250 of GE's ecomagination "CNG In A Box" fueling systems across the United States through 2015 via an affiliate, Peake Fuel Solutions.

Their goal is to become the catalyst for auto makers to produce nat gas/petrol cars in the states and then become a key supplier for fuel.

3.      Nothing Is 100% Efficient
This law states that you will lose some energy when trying to convert one energy source to another.  In the market, you may experience this when you are paying commission and maybe only getting 95% of your money invested in the asset you want to buy.

When you burn gasoline in your car engine, you are only capturing about 25% of that fuel’s potential energy.  For natural gas, this might be a good thing because it (CNG) can be produced at about the same cost (or less) and gets better mileage than traditional gasoline. 

In fact, you can store about the same amount of CNG needed to get typical mileage you would from standard petrol, but at a lower cost.   Because both types of fuels are similar in volume and mileage, it makes sense to convert vehicles to nat gas.  In Friday’s Real Time Insight I mentioned that companies like Waste Management (WM) and Ryder Systems (R) are converting their fleets to natural gas and thus saving money on fuel.

As an investor, there is an even more direct way to invest in this conversion: through the engines themselves.  Westport Innovations (WPRT - Free Report) ) is a leading developer of technologies that allow engines to operate on clean-burning fuels such as natural gas, hydrogen and hydrogen-enriched natural gas. Back in 2001 they partnered with Cummins (CMI) to create Cummins/Westport, a 50/50 joint venture to produce Natural gas engine for industrial and commercial use.

While you cannot invest in the joint company directly, Westport would be the key beneficiary of a large take-up in machinery being that the majority of their income is derived from the natural gas conversion business.

There is a multitude of ways to invest in natural gas, just make sure you don’t get burned in the wrong one.

(We are reissuing this article to correct a mistake. The original article, issued May 29, 2012, should no longer be relied upon.)

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