National-Oilwell Varco, Inc. (NOV), Chart Industries, Inc. (GTLS): How To Cash In On The Unfolding Shale Gas Boom

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Energy experts have been bending our ears about the unfolding natural gas revolution in the U.S., for quite some time now. Not without a reason. Technological advancements in the way natural gas is being extracted from the earth have triggered an unprecedented surge in domestic production.

Over the past ten years, the combination of horizontal drilling and hydraulic fracturing – a process also known as fracking, – has allowed access to immense volumes of shale gas – gas that’s trapped between shale formations – which, up until recently, were uneconomical to produce.

The U.S. energy industry is on the verge of shaking up the global balance of power. So, how can you cash in on this trend?

National-Oilwell Varco, Inc. (NYSE:NOV)

The gist

In plain language, the U.S. is gradually becoming energy independent.

During the past couple of years, domestic oil production has been following a steady uptrend, backed by technological breakthroughs and high oil prices. At the same time, demand for oil in the developed world is heading south. Cars are more fuel-efficient than ever while alternative and cheaper energy solutions provide households and businesses with a backup plan. Government projections show that, by the end of this year, the U.S. will produce more oil than it actually consumes.

In the natural gas industry, things are getting even more interesting. In 2011, nearly all of the natural gas that was consumed in the U.S. was produced domestically. Not only that, but also in a recent report the Energy Information Administration (EIA) indicated that U.S. natural gas production is poised to climb as much as 44% over the next thirty years.

This upward trend is mainly driven by mountainous growth in shale-gas production, which is estimated to double over the same period:

Last year, shale gas production reached sky-high levels making up 40% of total domestic natural gas production. Throughout 2012, U.S.-based producers spent money like waterdeveloping record levels of new reserves, despite the low gas prices taking a toll on their returns. Apparently, producers are willing to pay a premium to increase their reserves.

At the moment, the U.S. is fourth among countries with resources of technically recoverable shale gas reserves:

Source: EIA

But, there is a huge difference between technically and economically recoverable resources. According to EIA, “technically recoverable resources represent the volume of natural gas that could be produced with current technology, regardless of natural gas prices and production costs”. On the other hand, economically recoverable resources are resources worth exploiting because they generate economic returns.

Geological parameters, as well as positive above-the-ground factors can most definitely boost the profitability prospects of recoverable resources. EIA says that North America has significant above-the-ground advantages – such as availability of water resources for use in fracking, and advanced expertise in the space – that may not apply in other parts of the world.

How to play the energy boom?

One way to cash in on the unconventional gas boom in the U.S. is by betting on companies like National-Oilwell Varco, Inc. (NYSE:NOV) – the leading supplier of all the nuts and bolts oil and gas producers can ask for –, or Chart Industries, Inc. (NASDAQ:GTLS) – the maker of highly engineered equipment used for storing and transporting liquefied natural gas.

Chart Industries, Inc. (NASDAQ:GTLS) shares are trading at 40 times trailing twelve- month earnings, and around 20 times next year’s earnings, which means that now might not be the right moment to start a position. Yet, it is a stock worth keeping an eye on for the long term. Jonathan Compton, managing director of London-based Bedlam Asset Management, gives it the thumbs up pointing out that “it’s a relatively small company that’s right at the center of one of the primary trends in world energy.”

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