Investing for the US Natural Gas Boom

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As an investor you need to be savvy, you need to be smart, and most importantly, you need to pay attention.

What year did you first hear about fracking? Shale gas? Or Williston North Dakota? If Bush was the president, congratulations, if not, you need to do better.

Way back when most people had not heard of these things I had, because I read business magazines, and watch business news, and absorb information like a sponge. I wanted to invest in natural gas, so what did I do, I bought pipelines in the form of MLPs, which are great dividend plays. I didn’t buy drillers or producers because I wasn’t investing based on the price of natural gas, I didn’t think drillers would make a ton of money. Pipelines however are a play on volume, and I thought the natural gas volume our country consumed would go up (at the very least, it wasn’t going to drop). I was right, I made a killing, even moreso thanks to this last Sunday’s news of the Kinder Morgan consolidation, a nice 15% pop on my MLP.

MLPs are supposed to be boring businesses that spin off income (sometimes nontaxable) but don’t necessarily grow much. Thanks to the recent growth in the US gas industry I’ve enjoyed both dividends and really nice capital appreciation, its been fun, and while I might still recommend MLPs (especially for people in a high tax bracket, near retirement, who expect to be in a lower tax bracket in retirement – and of course who would hold the MLPs in a taxable account). I think the easiest money there has been made.

So for myself I again started thinking, what happens when you have abundant cheap energy in the form of natural gas? For one thing manufacturing moves back into our country. Foreign automakers are now exporting US made cars from here, we’re one of the cheapest places in the world to manufacture because of our energy costs (please, don’t screw it up Washington). Labor might be cheap in China, but energy is cheap here, and cheap energy allows us to pay more for labor (so, hey liberals, stop fighting energy).

I ended up zeroing in on two companies, Dow Chemical and US Steel. These might not seem obvious natural gas plays at first glance, but they are if you look closer. Dow Chemical makes a ton of products, most of which need hydrocarbons for feedstock, they can use almost any hydrocarbon, it is merely a price issue, and when Nat Gas was over $10 MCF they were hurting, I remember seeing the CEO talk about trying to pass on increased costs to customers. Now what happens when Nat Gas falls to $2 MCF? That is like McDonalds if beef costs drop 80%. Profits will be made. Dow was a little beat-up, but not too bad. I also knew, being a Michigan resident, that the state had just repealed the patently stupid Michigan Business Tax (a tax on gross revenue, not net income, seriously, how stupid is that?) and was in the process of phasing out the Business Personal Property Tax (a yearly tax on equipment your business owns, like paying sales tax on your equipment every year). Dow is obviously a global company with facilities all over, but being headquartered in Michigan with plants here I knew they’d get at least some benefit from those changes, and the natural gas feed stock. Nice dividend too, so I bought some, and that also worked out well.

Then there is US Steel, once a $100 stock, now down, sharply, in a short period to under $20. Their problem was management and labor and they fell during the recession but opted out of the recovery because of poor management, but they also stood poised to benefit from cheap US energy. Have you ever seen a steel mill? One of the most amazing sites possible to see is an steel arc furnace go to work, when it first turns on, it is amazing. Have you ever seen a steel mill, did you notice the massive power lines heading in? Those things use a ton of electricity, and cheap natural gas means relatively cheap electricity here in the US vs overseas. That should give us steel makers a competitive advantage. Additionally, the manufacturing renaissance in the US also needs steel, and of course, the oil and gas industry itself (IMO the main reason the recession ended) needs steel. I’ve almost doubled my money now on US Steel (symbol of X by the way) in only around a year. They also have a decent dividend.

Anyone have any other ideas for downstream plays for the natural gas boom? Or any other big picture ideas? The trick to making really good money is getting in before everyone else does. What are the growth industries of tommorow?

Full disclosure: I’m long everything I mentioned here.

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