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?
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.”
During the first three months of 2013, National-Oilwell Varco, Inc. (NYSE:NOV) received $3.04 million worth of new orders skyrocketing its backlog to a record $12.92 billion. Also, recently, it doubled its quarterly dividend to $0.26 a share indicating a yield of 1.5%. At the moment, the stock is trading with a PEG ratio below the norm of one, and only 11 times analysts’ expectations for 2014 earnings. Out of 33 analysts tracked by Wall Street Journal, 22 think that it is worth buying while their average target price suggests at least 20% upside potential.
Making a killing on fracking
Fracking – the drilling technology that, more or less, kick-started the energy revolution – involves shooting vast quantities of water and sand deep underground to smash rock formations and release deposits of oil and gas trapped inside. In the process, toxic chemicals find their way to the surface.
Natural gas may have emerged as a relatively clean energy, but the technology that is being used to get it out of crevices underground has raised environmental concerns. Consequently, companies that aim to help drillers operate more efficiently and mitigate environmental risks are in the spotlight.
One company that does exactly this, is Tetra Tech, Inc. (NASDAQ:TTEK). Tetra Tech, Inc. (NASDAQ:TTEK) provides an array of diverse services worldwide– including engineering, consulting, program management, construction management, as well as technical services – and focuses on solving complex problems associated with water management, the environment, natural resources, infrastructure, and energy.
For the past five years, its revenue has grown at a compounded-average rate of roughly 12% while, for the most recent quarter, the company’s cash from operating activities experienced a whopping 34% year-over-year lift.
Even though, it fell short of analysts’ estimates, during the quarter, Tetra witnessed strong demand for its environmental and water services from U.S. commercial and international clients. Going forward, the company expects its oil and gas businesses to bring in twice as much revenue as they did last year.
The cautionary tale
The shale gas revolution has breathed new life into the U.S. natural gas industry providing investors with exciting opportunities.
However, there is always a cautionary tale to be told when investing is involved. In this case, it’s gas prices. So far this year, natural gas has been one of the best-performing commodities. A pick-up in gas prices is good news for drillers, but, for energy intensive industries like nitrogen-based fertilizers is, obviously, a living nightmare.
So, when looking to cash in on the ongoing energy boom make sure you keep tabs on price moves and overall market trends. For more information on National-Oilwell Varco, Inc. (NYSE:NOV), claim your copy below.
National-Oilwell Varco, Inc. (NYSE:NOV) is perhaps the safest investment in the energy sector due to its industry-dominating market share. This company is poised to profit in a big way; its customers are both increasing the number of new drilling rigs and updating aging fleets of offshore rigs.
The article How To Cash In On The Unfolding Shale Gas Boom originally appeared on Fool.com and is written by Fani Kelesidou.
Fani Kelesidou has no position in any stocks mentioned. The Motley Fool recommends National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Fani is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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