Friday, October 7, 2011

Will Natural Gas Become the Leading Energy Source? A Bullish Outlook on the Industry

Petroleum and coal have for years fueled the United States economy, providing just less than two-thirds of our energy consumption in 2009. Going forward, much talk is made about moving towards clean energy sources, like wind and solar. These are speculative fields that, in my view, are not too practical from a cost perspective.

While wind and solar energy developments remain very much works in progress, I find that the natural gas industry is ready to go. It is anticipated that the known reserves will last us more than a century. In addition to being much more environmentally-friendly than our two leading energy sources in terms of CO2 emissions, natural gas is also in America's best interest as a matter of security. Fracking critics become increasingly questionable as economic dependency on hostile nations grows. 

But yet natural gas provided less than a quarter of 2009 energy consumption. There is tremendous growth potential. As a surveyor of several natural gas sites, I have seen the demand for this energy source from automobile manufacturing plans to the hungry wildcatters setting up sites. In this type of climate, the shift to natural gas provides ideal risk asymmetry. The question then naturally follows, which players of the industry should one invest in?

There were a few companies that I highlighted elsewhere that could outperform their peers. I provide some valuation and competitive analysis in the links below:

Chesapeake Energy (CHK): my financial commentary can be found here;
El Paso (EP): my financial commentary can be found here; and
BP plc (BP): my financial commentary can be found here

Of these three energy companies, I find myself most bullish, by far, on CHK. The natural gas company is diversified in several lucrative plays. It is also more structurally exposed to "striking a fortune" than competitors given its tremendous scale and strong acquisition growth capability. The market currently values the company at around 10x forward earnings, which I find to be a considerable discount to the cumulative intrinsic value of its plays. To the extent that it is well invested in other cheaper sources, Chesapeake is at once a safe investment and a lucrative one, in my opinion.

So, in opening up the discussion, I would like to know what your thoughts are on energy and the industry's undervalued competitors...