The following is a guest essay by Stan Barton, reproduced with his permission. I share Stan’s enthusiasm for natural gas and consider the redevelopment of domestic energy to be one of the greatest investment themes of the next decade. In particular, I see enormous potential for natural-gas-powered cars, something that Stan touches on.
It remains to be seen whether Obama is willing to go against his party’s environmentalist wing and embrace a fossil fuel like natural gas. But I tend to agree with Stan that, as a second term president, he has more flexibility to stray from the party line. And what better legacy could a president leave his country than energy independence? Please enjoy:
The Surprising Obama Trade: Natural Gas
By Stan Barton
The unemployment rate is unlikely to drop below 7% ever again. That is because neither trickle-down strategies nor big government interventions in the capitalist system can claim success in improving the U.S. economy. Throughout our history, the best spurts of economic prosperity have developed from some revolutionary impetus, most recently the prosperity created by the Internet. There are few influences that can be game-changing for a system the size of the U.S. economy, but the recent discovery that the United States has an abundance of natural gas provides the potential for that impetus. With a champion pushing for a revolutionary change to replace oil as the primary energy source, employment and prosperity can return in full force.
A policy to take advantage of the natural gas abundance will have a “New Deal” type influence on infrastructure construction and manufacturing, and it will provide cheap energy to fuel growth in many sectors. Cheaper than oil per BTU, natural gas would have long-range systemic benefits for inflation control, just as Internet technology created systemic improvement in productivity. This article makes the case why we think that President Obama will focus on centering the U.S. energy policy on natural gas, and how it will help stocks that are in the sweet spots: natural gas exploration, well services, pipelines, fueling stations, vehicles and infrastructure.
The Obama Factor
Actions of the EPA in the first four years of the Obama administration are not indicative of the regulatory flexibility that a natural gas initiative will require. Support for alternative fuel aside, Obama’s record has been comparatively moderate on energy policy. Obama did not stand in the way of the southern section of the Keystone pipeline, and most expect him to approve the Northern portion now that the election is history. He has stumped for clean energy, and protecting the environment is a major part of the Democratic platform. Substituting natural gas would reduce the pollution from burning coal and oil, and that would help him keep his promise and should appeal to the environmentalists. The EPA will take a back seat to jobs, economy and energy independence.
Unfortunately, there are those in his party that cannot see past wind generators, solar panels and algae as solutions to fossil fuels. The president has had to stay close to the ecological segment of his base in his first term. The second term of a president’s administration gives the incumbent a chance to stray from strict party affiliation, and that is why we expect much more leadership from Obama as a proponent of natural gas in a second term. For example, he has ignored the “carbon tax” that some are proposing, and he could afford to stand with GOP lawmakers against that issue to influence their support for the natural gas initiative.
The abundance of natural gas is a result of horizontal drilling and fracturing the substrate with pressurized liquids (fracking) to release the trapped gas. It should be noted that the environmental impact of fracking is not completely known. The technology has been in use for a decade and most consider its effects controllable. There are objections over the amount of water that fracking requires, and the potential pollution of groundwater, among other concerns. The new process has created the potential for jobs through innovation in mitigating these concerns and maximizing production. An example is the well-servicing industry which is shaking out the traditional suppliers, opening doors for companies with the flexibility to take advantage of the new technology and its needs. This is in the infant state and the “wildcatters” are back and they will be developing clever ways to exploit the situation, just like Amazon, Apple and many others were able to get more out of the Internet than anyone originally imagined.
I know that many will say that Romney would have been even better for the natural gas industry. It is true that a Republican administration would be more likely to relax environmental rules, which might accelerate the movement to centering our energy policy on natural gas. However, I think that for businesses, and the public in general, to adopt a new direction in energy with enthusiasm, all political stakeholders need to back the movement. In this polarized environment, only a second-term president will be able to move to center in order to get things done.
There will likely be some push-back from traditional industry proponents of coal and oil. Romney would have been obligated to pay attention to those lobbyists, but any effort by Obama to include them in the new energy policy would be a win-win. It is doubtful a Republican administration could get enough Democratic support for this change. Only Obama can afford to be independent, working with both parties, and I think that an investment based on that premise would be a high-return, contrarian opportunity.
So how do we invest to take advantage of this revolutionary move to natural gas as our main energy source? We normally do not suggest trying to buy the bottoms or predict a change in market direction. It is a contrarian position that companies relying on increased natural gas use will flourish, and most of the stocks we are featuring are currently out of favor. This is mostly because the glut of natural gas is perceived as a negative supply-demand situation. Also, the perception that Obama will not be favorable to fossil fuels is probably pressuring these stocks.
The first consideration is that a stock must be a long-term investment as this transition will take time. However, stock investing tries to be predictive of future reality, and now is the time to look for the companies that will flourish.
The second consideration is that we should get good value for our money, since we are taking a risk on the movement to natural gas to replace oil and coal in many industries. The stocks we list here are generally selling at attractive multiples to book, sales and next year’s earnings. These factors do not necessarily guarantee that the stock will go up, but they do provide some comfort that the downside is limited.
The third consideration is that the stock should be one that is not completely dependent on a revolutionary movement to make natural gas the energy source of choice. An investment should have the possibility of prospering in a more moderate trend towards this commodity demand.
Following are thumbnails of some stock to watch if Obama supports a game-changing movement to employ natural gas:
Chesapeake Energy Corp. ($CHK) is one of the largest domestic producers of natural gas and owns natural gas resources. The stock has been punished by the gas glut and some executive mistakes, and CHK is selling well below its book value.
Precision Drilling Corp. ($PDS) is a Canadian well driller and service company that has made substantial investments in upgrading its rigs to take advantage of the new exploration and production technology. Like CHK, the stock has been beaten down and sells below book value.
Crosstex Energy LP ($XTEX) is a pipeline operating partnership that has been stagnant due to subdued natural gas prices. It does pay a 9% dividend, so investors can be more patient while collecting an income. The recent massacre of dividend payers in anticipation of a higher tax rate may be overdone considering the low-yield alternatives.
Clean Energy Fuels ($CLNE) is developing a network of natural gas fueling stations. This will be essential in a movement toward use of natural gas in vehicles. Having a market cap of only $1 billion, it is questionable if CLNE has the resources to provide the network needed; however, it does have a head start.
Cummins, Inc ($CMI). is an old name in internal combustion engines and is perfecting engines to operate on natural gas. It has the capacity to produce in volume the equipment necessary for vehicle use of natural gas.
Primoris Service Corp. ($PRIM) is a specialty contractor and infrastructure company that provides a range of construction, fabrication, maintenance services, with a large presence in the petroleum industry. The infrastructure for a natural gas network would create opportunities for this company.
A policy that focuses on the expanded use of abundant natural gas would be good for the U.S. on several fronts: environmental, energy independence and employment. The president ultimately must realize this obvious opportunity and take the lead in pushing such a policy. A second-term president has the opportunity to cross party lines, moderate restrictive party positions and fearlessly push for revolutionary change to cement his legacy.
It is only a matter of time before natural gas vehicles and power plants become the norm rather than the exception, and the stocks in this article stand to benefit from that reality. The question is when Obama or other politicians will push for this initiative. President Obama has the unique opportunity to make this happen in the next four years. Even if it turns out that others take the lead, we think that Obama would side with them.
Stan Barton is the Chief Analyst for Barton Legacy Advisor, LLC, an old-school advisory which is dedicated to helping successful individuals and families build their legacy. To discuss your legacy, contact him at [email protected] or read his articles at www.bartonla.com.