Connect to share and comment

Column: An environmental compromise for investors: natural gas

PlacardEnlarge
(Globalpost/GlobalPost)

By Conrad de Aenlle

LONG BEACH, California (Reuters) - Americans are continually encouraged to raise their environmental awareness, but applying green principles to investing isn't easy - at least if making money remains a goal. Producing energy from renewable sources like wind and solar is notoriously unprofitable.

But it may be possible to shrink your carbon footprint without shrinking your net worth if you compromise a bit - by investing in companies involved in generating power from natural gas. It is cleaner than oil and coal, and has the commercial viability that cleaner, greener forms of energy don't.

"In a world that needs to clean up emissions but where renewables are unrealistic, natural gas is an obvious bridge fuel," said Stephen Simko, an energy analyst at the independent Chicago research firm Morningstar.

He highlights two producers of oil and gas that have a particular emphasis on gas, which he finds a superior fuel source because it's far cheaper than oil and therefore more likely to rise in price in coming years. Both companies are trading well below his estimate of fair value, too, so they could be in line for a positive double whammy if gas recovers and the stocks' discounts erode.

Ultra Petroleum Corp is worth $40 a share, Simko said, nearly double Monday's closing price of $20.30. Peyto Exploration & Development Corp has a fair value of $36, he reckons; it closed Monday at $29.65.

Kent Croft, co-manager of the Croft Value Fund, also sees potential in natural gas as an investment and a relatively clean fuel source. Thanks to newer (albeit also controversial) extraction technologies like fracking and horizontal drilling, "we can build an energy infrastructure that is 40 to 50 percent cleaner burning than what we had before," he said. "That's a huge net positive, even though it's a carbon-based fuel that purists would be up in arms about."

CHEAPER ENERGY

With the cost of producing a unit of energy from crude oil roughly five times the cost of producing it from natural gas, Croft believes that economic and societal demands will trump a quest for environmental purity. His fund, which has beaten the Standard & Poor's 500 Index by about 1.3 percentage points a year for the last 10 years, holds shares of several companies involved in producing and/or transporting gas.

Producers could also benefit from increased purchases of their gas fields by investors in countries, especially in Asia, where gas is more expensive to produce. Even if prices remain subdued, the companies that Croft likes typically don't rely only on extraction; they also own pipelines that generate income based on the volume of gas that courses through them and so are less sensitive to price swings.

Williams Companies Inc is a jack-of-all-trades that produces, processes, trades and transports gas. Croft conservatively estimates the stock, which closed Monday at $33.26, to be worth more than $40. That's based on what he thinks a buyer would have to pay for its assets but assumes no rise in commodity prices or other factors, such as improving business prospects, that he thinks make the company worth more.

National Fuel Gas Co similarly "has a little bit of everything," including a regulated utility in upstate New York, 3,000 miles of pipelines, 34 storage facilities and pieces of the Marcellus and Utica Shale gas reserves. Production is likely to grow 25 percent this year and 15 percent a year for the next three to five years, he predicted, and he values the stock at $75; it closed Monday at $61.18.

Southwestern Energy Co is purely a production company and therefore more sensitive to gas price movements. The stock closed Monday at $38.23, well below the $46 or so that Croft reckons it's worth, a figure that "doesn't include the possibility of better values going forward, better exploitation of their acreage and the fact that they're a low-cost operator, so they're profitable at a lower gas price," he said.

If gas heads higher instead, as Croft and Simko expect, and take these stocks with it, shareholders may be able to enjoy their gains with a clear conscience, if not quite a pristine one.

(The author is a Reuters contributor. The opinions expressed are his own.)

(Editing by Linda Stern and Jim Marshall)

http://www.globalpost.com/dispatch/news/thomson-reuters/130709/column-environmental-compromise-investors-natural-gas