Bubbles are not a once in a millennia occurrence. From the Dutch tulip mania and the East India Trading Company to America’s subprime housing boom, bubbles continue to upset markets. Natural gas appears to be in a similar situation. Increased demand through conversions from crude based fuels to natural gas is setting up the market for a boom. Early investors can gain by preparing their investment plans right now.
Many companies are experimenting with natural gas conversion programs. Recently the railway BNSF announced that they are going to test natural gas in a number of their trains. Oil is not as plentiful as it was in the last century and switching to natural gas can provide drivers with a significant discount. As an example Clean Energy Fuels Corp (NASDAQ:CLNE) notes that a driver in California on January 23, 2013 could have saved $1.25 per gallon by switching from diesel to natural gas.
Clean Energy Fuels Corp (NASDAQ:CLNE) operates a number of stations for the fueling of natural gas vehicles. The company continues to develop America’s Natural Gas Highway with a network of stations throughout the nation in order to enable long distance travel.
Already the firm’s investments coupled with low natural gas prices are starting to pay off. Revenues have steadily increased and in 2012 the firm brought in $334 million. Profits are still uncertain as the company is still in investment mode. Creating a brand new network of fueling stations throughout a nation is not a cheap endeavor. With a debt to equity ratio of 0.61 the firm is not overly indebted, but it is definitely a growth play as it currently trades at a price to book ratio of 2.12.
Westport Innovations Inc. (USA) (NASDAQ:WPRT) has developed a number of technologies related to natural gas engines and now holds more than 300 patents. Through partnerships with manufactures like Cummins, Westport Innovations Inc. (USA) (NASDAQ:WPRT) has been successful in bringing a number of new engines to market. As a whole these new technologies increase demand for natural gas and take advantage of the price differential between crude oil and natural gas.
Every story has two sides and Westport Innovations Inc. (USA) (NASDAQ:WPRT) is no different. A challenge of natural gas powered vehicles is their higher ticket price. Also, if the United States were to suddenly tighten environmental regulations on fracking and force drillers to pay more attention to their effects on the nation’s aquifers, then the subsequent spike in natural gas prices would negatively affect demand for natural gas powered vehicles.
This company carries less debt than Clean Energy Fuels Corp (NASDAQ:CLNE) with a total debt to equity ratio of just 0.22. Its five year revenue growth ratio of 36.21% shows that its market is expanding, though profits have been negative for an extended period of time. Westport Innovations Inc. (USA) (NASDAQ:WPRT) is situated perfectly to aid in the adoption of leading technology, but its status as a profitable firm is still unclear.
United States Natural Gas Fund (NYSEMKT:UNG) is another way to take part in the natural gas market. The downside with simple commodity ETFs is that cotango costs eat into profits and can cause strong tracking errors. The widening spread between the spot price and the ETF price in the above chart clearly shows this problem. Over time the ETF moves further way from the underlying commodity.
The upside of the U.S. Natural Gas Fund is that it is widely traded and offers direct exposure to changes in the natural gas. An investment thesis based upon natural gas prices can be difficult to execute through equity investments. A company’s stock price will be affected by a number of company specific factors and this ETF helps to avoid these issues.
Invest with Caution
Clean Energy Fuels Corp (NASDAQ:CLNE) and Westport Innovations Inc. (USA) (NASDAQ:WPRT) both play a critical part in helping to bring natural gas out of its doldrums, but they are not surefire investments. Natural Gas is a very volatile commodity and a suddenly substantial increase in price could serious decrease demand for natural gas from the transportation sector. At the same time the U.S. Natural Gas Fund is not a great long term investment with its significant tracking error.
Natural gas is setting itself up for a bull market, but investors need to remember the risks of each investment vehicle. For the very risk adverse it is probably best to invest in larger integrated energy firms that offer exposure to natural gas in addition to other markets.
The article Natural Gas Transportation Is Calling in the Bulls originally appeared on Fool.com and is written by Joshua Bondy.
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