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Chesapeake Energy Corporation (CHK): The Best Way to Invest in the Natural Gas Revolution

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The natural gas boom is one of the most important trends affecting the economy and different industries over the next years, so positioning your portfolio in order to benefit from such a revolutionary shift in the US energy matrix is certainly a smart idea. The good news is that there are many possibilities to invest in the natural gas revolution, but investors still need to do their homework in search for the best alternatives.

On Supply and Demand

Producers like Chesapeake Energy Corporation (NYSE:CHK), may be the first option that comes to mind when thinking about benefitting from booming nat gas production, and this bet may work out pretty well in the long term. But investors beware, producers in general and Chesapeake in particular will need to face some serious challenges in the middle term.

With production booming and gas prices falling from a cliff, profitability has been a problem for Chesapeake Energy Corporation (NYSE:CHK) and its peers lately. Over the long term, prices should remain high enough to encourage production, so the situation should become more balanced over time. Still, the future level of profitability in the industry is quite uncertain at this stage.

When it comes to company specific issues, Chesapeake Energy Corporation (NYSE:CHK) has had its fair share of problems: the company expanded too aggressively over the last years, and it has a bad reputation in terms to capital allocation efficiency and management stewardship towards shareholders. On the other hand, there have been some encouraging signs lately, it`s polemic CEO Aubrey McClendon is stepping down, and the company is embarked in a restructuring of its business to increase financial strength and recover profitability.

Chesapeake Energy Corporation (NYSE:CHK) owns major land acreage in many of the most valuable resource areas in the U.S., and this puts the company in a privileged position to benefit from the nat gas boom. The company has been focusing more on joint ventures as a low cost strategy to increase production, which sounds like a smart idea considering industry conditions. If commodity prices help, and if the company is serious enough in its turnaround efforts, the stock could have a lot of upside potential. But at this stage Chesapeake Energy Corporation (NYSE:CHK) is quite a risky investment.

A Solid Pipeline

One thing looks quite clear, gas is replacing dirtier and more expensive sources of fuel like coal at a rapid peace, and this increases demand for transportation, storage and all kind of related services. Pipelines can be a smart way to bet on natural gas while at the same time capturing some very attractive divided yields.

Enterprise Products Partners L.P.  (NYSE:EPD) Partners transports and processes natural gas, natural gas liquids, crude oil, refined products and petrochemicals. It has a unique and integrated asset base across the midstream value chain: Enterprise gathers natural gas from wellheads from the Rockies to the offshore Gulf of Mexico, it operates gas processing plants, transports both natural gas and NGLs, provides storage and fractionation for NGLs, and markets natural gas and NGLs to the petrochemical industry.

The company is in the process of developing a new 270-mile pipeline header system that will deliver ethane to petrochemical plants in the Gulf Coast region, and it’s in a privileged position to benefit from increasing demand for natural gas liquids over the next years. Being a natural monopoly, competition is not a big problem and, in addition to all this, investors in this master limited partnership are getting a 4.4% dividend yield.

Disruptive Plays

Companies like Westport Innovations Inc. (USA) (NASDAQ:WPRT) and Clean Energy Fuels Corp (NASDAQ:CLNE) have many things in common, to begin with: both companies are betting on LNG as a cheaper and more efficient fuel for vehicles, and they are also small companies with massive upside potential if things turn out as expected for them.

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