2 stocks for the American energy boom

Our oil independence is no longer a pipe dream. Here's how I'm playing this trend.

By StreetAuthority May 2, 2014 8:29AM
Natural gas tanks at a site in North Dakota (© Rich LaSalle/The Image Bank/Getty Images)By David Goodboy

The vision of American energy independence has been bouncing around political and economic circles for decades. The widespread embrace of hydraulic fracturing (fracking) has brought this vision many steps closer to reality.

About five years ago, I worked with a niche hedge fund on developing alternative long-term investment ideas. One of the ideas we looked at was the massive supplies of natural gas that fracking was beginning to produce. We projected that an overabundance of natural gas would keep prices low for some time.

This prediction held true until a spike during this year's first quarter, but long-term projections for the next two decades call for an average price of $4 to $5 per million BTUs -- which would make U.S. natural gas the cheapest in the world.

Huge profits could be made by selling this resource to regions around the world that need the fuel -- but the problem lies in exporting it in a cost-effective way. If U.S. producers can solve this problem, America could become energy-independent and an exporter rather than an importer of energy.

Part of the technical solution to this problem requires immense investments in infrastructure, representing one potentially lucrative opening for investors. The solution also involves condensing natural gas into a form that's more economical to transport.

The regulatory solution for exporting natural gas is coming along rapidly, with the U.S. government's recent approval of eight terminals for exporting this condensed form of the fuel.
In this map, you may have noticed the initials LNG, which stands for liquefied natural gas. Formed by cooling natural gas to minus 260 degrees, LNG takes up to 600 times less volume than the gas itself.

The problem with natural gas has always been how to transport it without the use of pipelines. LNG solves this by reducing the space and expense required to transport the fuel to regions not served by pipelines. Transportation costs typically increase with distance, but shipping costs for LNG increase at a much slower rate than natural gas.

While widespread U.S. commercial interest in LNG is new, the fuel itself has been known for many years. During the 1970s energy crisis, the United States tried unsuccessfully to get a handle on this form of energy. However, growth grew quickly in the Asia-Pacific region, resulting in an LNG trading market.

This market is based in part on long-term contracts that are for 20 years and are truly a front-loaded investment. An LNG spot market has developed under these contracts, but trade remains dominated by just a few major players.

While most regular investors are precluded from participating directly in the LNG market, profitable opportunities exist in the infrastructure buildout. Here are two stocks poised to profit from LNG:

1. Dominion Resources (D)​
Dominion is a diversified utility company that is investing close to $4 billion in the LNG terminal in Cove Point, Md. Expected to be finished in 2018, this terminal is expected to dramatically lift Dominion's earnings capacity. Shares have been in a solid uptrend, and buying the momentum on a breakout above $73 makes good sense.
2. Chart Industries (GTLS)​
This Ohio company specializes in the storage and production of hydrocarbons and industrial gases. In addition, the company's expertise is in cryonic storage, which is the lynchpin of LNG shipping. Shares have skyrocketed over 500 percent since October 2010, but it's important to note that shares just hit 52-week lows and has been in a sharp downtrend. In addition, first-quarter revenue fell 2.7 percent, net income dropped 23 percent, and Chart cut its earnings forecast by 10 cents a share, citing weakness in the biomedical business and holdups in LNG projects. However, I think this pullback has set the stock up for a great buying opportunity.​
Risks to consider: While I am convinced that LNG will eventually be a major boon for the United States, a variety of legislative and regulatory hurdles remain. Investors who wish to profit from the infrastructure buildout should be prepared for a long wait. Always use stop-loss orders and diversify when investing.

Action to take:
I like Dominion as a momentum play on a breakout above $73. Stops should be set at $69, and my 24-month price target on D is $85. On the other hand, GTLS has fallen into the value buy channel. I love this stock at in the $75 to $65 channel and expect a run back above $120 within the next two years. I recommend hard stops at the $59 level in case my analysis proves incorrect.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.


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22Comments
May 2, 2014 10:38AM
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After reading the header here this morning I see yellow journalism is indeed well and alive.  The big banner about job creation with the underlying truths never mentioned. Please cite the jobs supposedly created and their wage as that would be a better barometer in my opinion.  And then lets visit the grocery store and price out a few items like toilet paper and paper towels.  Then lets hit up the gas station on the way home.  This in my opinion is a truer barometer.  The implied suggestion employed people will create more demand can be a huge misnomer.  Most of the time I think these authors are just looking for peer or market acceptance with the validity of their articles secondary.  Or perhaps they have no real world experience and are just droning. 
May 2, 2014 2:43PM
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  There is always lots of talk like fracking is new. It is a many decade old procedure. The new is horizontal drilling following a pay zone horizontally for thousands of feet. While the fracking process does strain open the fissures the placement of the prop to keep the fissures open during the pumping process is equally if not more important giving the well longevity. These fissures tend to close up during pumping without a prop reducing viability.

 IN the old days they only used silica sand for the prop. Now while they still use silica sand they also use a ceramic bbs for the process.

 And yes the water at the surface must be carefully controlled. There are a number of companies doing this, HEK for one. They reprocess the water for reuse, remove the salts from the salt water from the well for road salt.

 Like most processes in life they are learning to do a better job al the time.

There is one company using a gas frack process and no I don't remember the companies name or know well the process is working.

May 3, 2014 12:05AM
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Hey here's a hot one for you Hope and Change people Solyndra!
May 2, 2014 10:55AM
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Folks, folks, folks, if Wall Street believed this jobs report we would be up triple digits and counting; Wall Street looks at this number with plenty of skepticism plus, the labor participation numbers were awful so, we are in the red again fighting to return to the flat line....Face it, job creation is substandard, in other words, it sucks. Like we always tell you, this administration can fool the low information voters out there, they cant fool Wall Street...We will keep trying to get back in the green this afternoon....Don't forget its Friday...More later.
May 2, 2014 10:17AM
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while fracking has enabled more oil to be produced, "we" will not have energy independence because "we" do not own or control the oil sale or price.  world markets set the price. 

 

energy independence comes from any generation or conservations we do on our own. 

May 2, 2014 1:04PM
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Fracking happens way down below where the water is. The problem is in surface spillage around their activities. 
May 2, 2014 9:12AM
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"Energy Future Holdings, the largest power company in Texas, filed for bankruptcy protection on Tuesday, seven years after its record leveraged buyout stacked it with debt just as prices for its electricity plunged.

The former TXU Corp owes tens of billions of dollars to hedge funds and investment firms, and the Chapter 11 filing is among the largest ever.

Energy Future said it entered bankruptcy with significant deals in place with creditors that would eliminate approximately $40 billion in debt."


May 2, 2014 10:57AM
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Fracking is great as long as you don't live or get water from the areas being fracked.
May 2, 2014 4:14PM
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"Like most processes in life they are learning to do a better job al the time."

Yeah right, we heard that same BS just before 3-Mile Island, the Chernobyl disaster,  Fukushima Daiichi Nuclear Disaster, and the Oil Spill Gulf of Mexico 2010, recognized as the worst oil spill in U.S. history. At the Rate we keep learning to a better Job all the time, by the time they eventually do figure how to actual do things right, there won't be anyone left to worry about it.
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