Natural gas has been touted by some as a greener alternative to other fossil fuels, and thanks to technological improvements to increase supply, the current price also makes natural gas an attractive option.
The relatively sudden increased availability of natural gas was a boon for energy consumers. Unfortunately for investors, natural gas price plummeted through the period 2007 to 2012 as demand outpaced supply. Futures prices bottomed out in early 2012 at near $2.00 and have since risen to fluctuate between $4.30 and $5.00 throughout 2014. The industry generally considers $4.00 to be a threshold price for decent returns.
Even with higher prices, the future seems bright for natural gas. Power companies that are converting or building more natural gas production will be at an advantage, not just from prices, but also from the impending Environmental Protection Agency (EPA) carbon restrictions that are going to strongly affect coal-fired power plants. Given the Supreme Court’s recent ruling that affirms the President’s authority to regulate carbon emissions through the EPA, it seems likely that natural gas will play a greater role in powering more American homes.
More manufacturers are switching to natural gas utilities, and natural gas vehicles are increasingly used in industry and transportation. Prices are considerably higher in Europe and Asia, thus exports look promising.
All of these things make natural gas likely to be a reasonable investment – but does it meet your criteria for green?
Many environmentalists are torn between the potential carbon reduction caused by replacing coal and oil with cleaner-burning natural gas and the potential environmental impacts of the newer hydraulic fracturing (fracking) techniques that are contributing to the natural gas supply boom. Fracking processes have been blamed for every problem from earthquakes to fouling water supplies.
In May, the National Resources Defense Council announced an effort with FTSE and BlackRock to create a global stock index targeted at investors concerned with climate change. This index is different in that it will exclude not only coal and oil, but also natural gas, lumping them into the same hazard level (arguably incorrectly). However, at this point, it seems that natural gas is looked upon as the lesser of evils in the near term for most investors.
If you want to invest in natural gas but not in oil, note that many energy companies tend to be involved in multiple sources of energy including both natural gas and oil – so keeping a greener portfolio may be more difficult than you think. One place to start is to check the holdings of the First Trust ISE Revere Natural Gas Index Fund (NYSEARCA: FCG), an equity-based natural gas ETF, and look into the individual holdings in more detail.
Other ETFs are available that trade in futures contracts, such as the Teucrium Natural Gas Fund (NYSE: NAGS) and the US 12-Month Natural Gas Fund (NYSEARCA: UNL). These and similar funds are designed for specific risks, price assumptions and time horizons, so check into the basic purpose and goals of the ETF before forging ahead.
Another way to invest in natural gas is in the support and consumption side – for example, Clean Energy Fuels Corp (NASDAQ: CLNE) and Westport Innovations, USA (NASDAQ: WPRT) are in the business of natural gas-based engines and vehicles. Cheniere Energy (NYSE: LNG) deals with liquefied natural gas (LNG) – the method for compressing and transporting natural gas for export, among other things.
Energy stocks and futures are relatively volatile (no pun intended), so make sure you understand the risks of the energy investments you choose, and place them within the proper category in your portfolio holdings. As with any investment, you should check fundamentals, but for energy issues, the price/cash flow may be a better indicator of health than the P/E ratio. P/E's are often high for energy companies.
The companies/funds listed above are a sample of those in the field, and they are not intended as endorsements. You must do your own research when deciding on your investments in the natural gas field. With a little diligence, you are likely to find a natural gas stock that will fit in your portfolio, and perhaps with your philosophy on green energy.
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