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A New Motif for the Natural Gas Boom

1 February 2013 in Trading Ideas

A few weeks ago, NASA released a series of dramatic nighttime shots of North America, revealing great clusters of light at each major U.S. city. Attentive viewers noted an unexpected swath of light in Great Plains, almost as big and bright as New York City. No, North Dakota had not suddenly sprouted a new metropolis. Instead, NASA satellites were picking up thousands of hydraulic fracking wells running 24/7 — wells that are transforming America’s landscape, both literally and figuratively.

The fracking boom is already the subject of one motif: Shale Gas, which emphasizes companies taking advantage of new opportunities to sell natural gas. Our newest motif, Natural Gas Glut, asks a different question: What are some industries that could benefit from one of the boom’s effects – namely, that natural gas prices are now at a 10-year low, and are expected to go even lower?

Our team came up with four segments meeting that criteria. Three use natural gas as a raw material; the fourth relies on it for energy.

Refined petroleum is an important raw material in many of the products that play an essential role in the modern world. Plastics is an obvious example; another is nitrogen-based fertilizer.

Less well-known is that natural gas can in many cases be just as useful as petroleum as a starting ingredient. For example, it can be used in plastic resins, a fact that has not escaped the attention of big chemical companies, some of whom have begun to relocate manufacturing facilities to the United States to take advantage of the natural gas surpluses. Nearly half the companies in the Natural Gas Glut motif are in the chemicals industry.

The motif also includes two agricultural fertilizer makers, who use natural gas to produce ammonia, a starting point for many of their products. The third segment of the motif contains an industrial gas manufacturer; through a process called “steam re-forming,” natural gas is converted to hydrogen, which has an abundance of industrial applications.

The fourth group of companies in the Natural Gas Glut motif consists of oil refineries, which use natural gas as a crucial energy source. As such, declining natural gas prices could mean enhanced bottom lines for refineries.

Some readers might wonder why electricity producers aren’t on the list. Don’t they (along with consumers) also benefit from declining natural gas prices? They do, but remember that most utilities are regulated, with a fixed return, which generally means they must pass along savings to directly to ratepayers.

You can read more about the companies making up the Natural Gas Glut motif here.