Roger Conrad is managing partner of Alexandria, Virginia-based Halcyon Capital LLC. He’s been a frequent MoneyShow speaker since 1989 on utilities and other essential services stocks, as well as Canadian investing, master limited partnerships, and other income and growth investments worldwide. From 1989 to 2013, he was founding and sole editor of Utility Forecaster, a member of Hulbert Financial Digest’s Honor Roll in 2012.
Utility Forecaster's Roger Conrad discusses what he sees is the future for natural gas, as it becomes increasingly important to our economy.
Will natural gas save the world or something like that? We're here with Roger Conrad who is going to explain the natural gas hype and the natural gas reality.
Well, thanks Gregg. I think the reality for natural gas is we're going to use a lot more of it. We already are using a lot more of it...particularly the power generating industry has really ramped its use of gas. In fact, for the first time, electric generating companies are using more gas in the United States than they are using coal.
Which is really fascinating, because coal has really been the mainstay fuel for years and years and years-historically well over 50%. But because of the fact that a lot of the coal plants are older, they're not as efficient. You can put up a new gas plant with a much better heat rate; in other words generating a lot more electricity, a lot more efficiently and lot cheaper than you could ever in the past.
Also, natural gas has been cheaper than coal which is sold on world markets. All our gas here, all that gas that's been unlocked from shale is trapped here in North America, for the time being anyway.
So we're going to use a lot more gas going forward. We're using it for bus fleets, vehicles. The real question though is, is that step up of usage offsetting the massive supplies that we have here?
I think the answer is no at this point. I think that's one reason why gas usage-type stocks are very attractive now, because supplies look like they're going to be very cheap. So therefore we're going to build a lot more pipelines to utilities. We're going to see a lot more storage for utilities. We're going to see a lot more other usage like clean fuels, that Pickens company, things like that. Those are things that are going to really proliferate.
The flip side of that is the reason they're going to proliferate is because the price of gas very likely is going to remain very low. I mean, a lot of gas has been shut in this year because prices really crashed in the first part of the year. We had a mild winter. In some parts of Canada, it was pretty close to a $1 per million British thermal units.
And it went below that on the benchmark index in the US.
Almost any company can make big money selling gas at $10. Somewhat fewer can make it at $5 to $6; fewer than that can sell it at $3 to $4, an elite few at $1 gas. You may be talking about one or two companies that can earn dollar one.
Are they looking for demand to increase-say exports from the US to Europe and Asia? Is that what they're hoping is going to bring the price back to a decent level across the globe, and can offset some of the supply?
I mean that's really the game-changer, is when we start exporting natural-gas liquids. We are exporting natural gas...liquefied natural gas, or LNG. The problem that the country has right now is that all the facilities for trading LNG are geared for imports. That may sound crazy, but most of them built. They take longer, huge projects, they have long lead times, and they need a lot of permitting.|pagebreak|
Yeah, the boat just doesn't pull up to a pier.
Exactly, so you have to compress the gas. What we have right now are facilities, I guess, where it's decompressed and then it's shipped into the United States. There's not a lot of LNG moving into the US now, because it's just not economical when you can sell it in Europe or Asia for five or six times what you can sell it for here.
So that's not moving. It takes a long time to construct the parallel facilities, although we've seen some permitting. Some areas of the country are opposed to that, but we're starting to see some permitting of that. It's just a very, very long process.
So that's really the rub here, is that you do have technology, you do have the ability to export liquefied natural gas, basically compress it, cool it down, ship it across the world in tankers just like you do oil. That technology is just not available for North American natural gas.
So there's a lot of short-term hype. It sounds like what you're saying is if you're in it for the quality company for the long haul, you're OK. Don't play this like it's going to jump.
Right, if you want to buy a gas producer, make sure they're not highly leveraged, very well capitalized so they can ride up and down volatility and gas prices effectively. Make sure they have a rising production profile-in other words, some sort of area of North America where they can increase reserves. Those are primarily shale reserves.
In Canada, there are places like Horn River, Montney shale. The US of course, you have Eagle Ford shale, Barnett, Haynesville, Marcellus, Utica. So, I mean these places exist and the reserves are pretty low cost. But it's imperative for any producer to be able to increase their production and use that to offset a weak pricing environment.
We had a pretty nice run in gas over the summer. I think this winter is very likely to be much more normal than the last ones, which means more demand for gas.
It's important to realize that a lot of gas wells have been shut in. A lot of companies have focused on oil. So gas price is going up, you're going to see more drilling and at least companies uncap some of the facilities that they already have. There you go, you're going to have more supply on the market.
Inventory numbers even so are still above five-year averages, even with increased demand over the summer. Production, even with new wells and companies drilling oil and liquids rather than gas, so basically no new wells being drilled in most places, you still had a production increase of about 4% over the past year.
So there's a lot of gas out there, and it's just going to be a while before we have an ability to ship it to the markets where it's going to command a higher price.