Three More Industries Thriving From Record-Low Natural Gas Prices
by Mike Kapsch, Investment U Research
Tuesday, January 24, 2012
Since hitting a high of $15.37 in December 2005, the price of natural gas has plunged to its lowest level in over a decade to $2.30. That’s an 85% drop.
As Reuters recently reported, “The unrelenting surge in shale gas production and one of the warmest winters on record are driving the natural gas market toward uncharted territory. Soon companies may have to pay to get rid of their gas.”
So far, this has been tough news for natural gas drillers and electric utilities. Many drillers are ramping up their oil production, trying to make up for lost income.
Chesapeake Energy even cut its gas drilling production in half, which led to a bit of a rally over the past few days – leading some to believe we have seen the bottom.
Regardless of whether this is a bottom or not, low natural gas prices aren’t bad for everyone. A few other industries are seeing enormous boosts with cheap, readily available natural gas. Here are three to consider…
Industry #1: Plastics
Most people don’t know that natural gas is a key component used to manufacture certain plastics. That’s because natural gas naturally contains ethane.
Ethane is an odorless chemical compound that, through various cooling and heating procedures, is converted into ethylene, and eventually turned into plastic.
Companies like Dow Chemical (NYSE: DOW) and Du Pont (NYSE: DD) are big players in this sector. But smaller firms such as Ashland, Inc. (NYSE: ASH) and Eastman Chemical (NYSE: EMN) could also prove to be very lucrative in the near future as they take advantage of low natural gas prices.
In fact, companies are building new pipelines specifically to transport ethane. This is positive news for plastic manufacturers looking forward.
The Wall Street Journal reported just a few days ago that Enterprise Products Partners LP (NYSE: EPD) said it’s moving forward “with a planned 1,230-mile pipeline to transport ethane from the Marcellus and Utica shale regions to the U.S. Gulf Coast.”
Industry #2: Methane
Although ethane is found in natural gas, its principal ingredient is methane. It’s estimated that methane makes up 70% to 90% of natural gas.
For firms like Methanex Corp. (Nasdaq: MEOH), low gas prices signal a huge chance to profit.
Methanex specializes in turning methane into methanol. Methanol can be found in windshield wiper fluid, plastic bottles, paints, fertilizers, compact discs, fleece jackets… the list goes on and on.
America’s natural gas boom makes manufacturing methanol that much less expensive.
Methanex, the world’s largest methanol producer, is even relocating one of its plants from Chile to Louisiana to take advantage of these low prices. The new plant is estimated to churn out one million tons of methanol a year.
Bloomberg reports Methanex expects “the factory will generate $400 million in annual sales at current methanol levels [starting in 2014]… and there is potential later for another unit to be moved to the U.S.”
But chemical manufacturers aren’t the only companies that stand to gain…
Industry #3: Biofuels
The EPA has mandated that the volume of renewable fuel required in transportation fuel will be increased to 36 billion gallons by 2022. That’s roughly a 300% increase from today’s figures.
In other words, fuel standards are rapidly changing in America. And this is creating some interesting developments in the biofuel sector.
As MIT’s Technology Review reports, “A biofuels company based in Madison, Wisconsin, has developed a potentially inexpensive way to make gasoline and other valuable chemicals out of grass and wood chips. Its approach reduces costs… by using natural gas to increase the amount of fuel that can be made from a given amount of biomass.”
The company is Virent, Inc. Although it’s a private firm, Royal Dutch Shell (NYSE: RDS-A) and Honda Motor Company (NYSE: HMC), among others, have invested a good amount of capital into Virent.
And the future looks promising…
In fact, according to Technology Review, Virent’s founder says that thanks to the company’s latest developments, it’s now “in the ball park range to be competitive with crude oil.”
The important thing here is that developments like these show how biofuel companies are getting very creative about adapting to cheap natural gas to achieve their business goals.
Looking Ahead
Some experts, including our own David Fessler, warn U.S. exports of natural gas are about to increase. This supposedly will soon push natural gas prices higher, thus scaling profits back for these various industries. But federal officials report prices are only set to increase 54% by 2018.
By this measure, the price of natural gas would be $3.54 in six years. That’s still a 76% discount from its 2005 highs.
Good Investing,
Mike Kapsch
Article by Investment U
