When a commodity fluctuates in price as much as natural gas has in the past year, there are inevitably going to be winners and losers. From production to provision, companies that are affected by natural gas either cheer or cry when this fuel's price wobbles. To understand which is which, let's take a look at a few companies that will and won't benefit from this sector's recent volatility.
Although producers are inarguably the most necessary link in the natural-gas production line, they've been drilled by dropping natural-gas prices. Booming supply increasing at a greater clip than demand means that these companies are currently price takers, not price makers. Here are the top five producers, as well as their seasonally adjusted annual change in production:
Q1 2012 Natural-Gas Production
ExxonMobil (NYS: XOM)
Chesapeake Energy (NYS: CHK)
Source: Natural Gas Supply Association.
It should come as no surprise that ExxonMobil tops the list of natural-gas producers. The company estimates that natural-gas demand will rise by at least 60% by 2040, and it's preparing accordingly.
ExxonMobil's 10-K states that its proven natural-gas reserves amount to nearly 25 billion barrels of oil equivalent -- more than double that of its oil reserves. For now, though, more expensive oil continues to be ExxonMobil's cash king, accounting for more than four times the company's natural-gas sales.
Chesapeake has been hit especially hard, as natural gas makes up mroe than 70% of its estimated proven reserves for natural gas, oil, and natural-gas liquids. The company uses derivatives to cushion price drops, but 35% of its 2012 second-half production is directly subject to the whims of natural prices. Chesapeake is currently carrying a $268 million loss in natural-gas derivatives, and it missed earnings expectations last quarter.
Chesapeake did act wisely when it agreed to invest $150 million in Clean Energy Fuels (NYS: CLNE) last year. A natural-gas fuel station operator in the U.S. and Canada, Clean Energy Fuel stands to benefit from cheap natural gas and rising oil prices, spurring more vehicle fleets to make the switch to natural gas. Clean Energy Fuel boosted its annual sales by 38% in 2011, 14 percentage points higher than Chesapeake's sales growth. Chesapeake might have to wait a while longer before cashing in on its investment, though, since Clean Energy's small scale and intensive growth put in on the less efficient end of gross and operating margins.
Any natural-gas investor would do well to follow Chesapeake's lead and invest in less exposed natural-gas-related companies like Wesport Innovations (NAS: WPRT) and Cummins (NYS: CMI) . Both companies are at the cutting edge of natural-gas engine technology. They focus on diesel engine conversion, engine manufacturing, and general research and development. Westport's FY 2011 sales totaled $226 million, increasing its annual revenue by 53%. Its larger competitor Cummins raked in $18 billion last year, 36% more than in FY 2010.
For a historical perspective, I decided to see how the volatility of wellhead (at-the-drill) prices chalked up against natural-gas vehicle (at-the-pump) prices over the past 20 years:
Source: U.S. Energy Information Administration.
If you're looking to reduce the volatility of your investments, it seems that investors would be wise to steer away from energy producers and toward energy users. The two prices are correlated, but natural gas' wellhead price almost always swings more wildly than its at-the-pump price.
Foolish bottom line
If you're a strong believer in the future of natural gas, diversifying your portfolio with different players of the same game will reduce your stocks' swings and set you up for long-term steady gains.
Research and diversification are necessary activities for energy companies, and Clean Energy Fuels isn't putting all its chips in one basket. Motley Fool analyst Jason Moser has prepared a premium report outlining the key risks and opportunities that face this company, from management analysis to consumer awareness trends. It's chock-full of excellent analysis and comes with a full year of free updates, so be sure to grab yours today.
The article Hedge Your Natural-Gas Bets With...Natural-Gas Bets? originally appeared on Fool.com.
Fool contributor Justin Loiseau has no material interest in any companies mentioned in this article, but thinks every natural-gas investor should read this. You can follow Justin on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.The Motley Fool owns shares of Chesapeake Energy, Exxon Mobil, Devon Energy, Clean Energy Fuels, and Westport Innovations. Motley Fool newsletter services have recommended buying shares of Devon Energy, Cummins, Clean Energy Fuels, and Westport Innovations. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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