The proliferation of fracking and the possibility of a long-running, shale-gas boom are destined to make winners and losers out of a lot of industries beyond the energy sector.
Though prices have been at rock bottom recently, the end to volatility in supply and price will improve operating costs for a number of industries — from utilities to chemicals to transportation — and likewise potentially damage others, such as coal and railroads.
“The industrial sector is going to be a big winner,” says Ron Denhardt, CEO of Strategic Energy & Economic Research, a Massachusetts-based energy consulting firm.
Manufacturing
For instance, paper and glass makers that can use either natural gas or oil to operate will benefit from more affordable energy, helping their cost structures, say experts.
Included in this group are energy-intensive industries such as glass, paper, and cement manufacturing.
Corning , which just introduced a new flexible glass product, seems a likely benefactor. Incremental demand for products required to extract the gas will help metal companies such as U.S. Steel , which invested $95 million in a new plant in Ohio to supply steel pipe to shale-gas extractors.
Ditto for small-cap utility companies, which are already shifting to natural gas from coal. The stock prices of utilities Niska Gas Storage Partners ,AGL Resourcesand Atlas Energy have risen over the past year even when natural gas prices have dropped. Plus, they all offer dividend income.
Large chemical companies that manufacture natural gas treatment products also should see a significant upside in about five years.
A 2011 study by the American Chemistry Council calls shale-gas "a game changer," with the potential for generating an additional $32.8 billion in industry production.
Subash Chandra of the securities firm Jefferies & Co. mentions Dow Chemical as a main player in this arena since it uses natural gas to manufacture its products. LyondellBasell , which has a slightly smaller market share than Dow, is another strong pick.
Transportation
Rising diesel costs have made natural gas-powered commercial vehicles a suddenly hot commodity, though investing here, too, comes with its own risks.
From garbage truck fleets to truck-leasing companies to delivery concerns such as UPS and FedEx, there is plenty of excitement about saving big bucks by buying trucks that will run on natural gas. Fleets of the surface shipping companies can use natural gas to refuel at a central depot on a regular basis.
But concerns about the dearth of refueling stations on a long-distance scale — there are only about 70 nationwide right now — are limiting development of long-haul trucks and passenger vehicles.
“Infrastructure is the critical factor,” says Ann Duignan, a managing director at J.P. Morgan Equity Research. “Fleets would be much more willing to invest in vehicles if they knew when more stations were coming. Because, if it’s not soon, who’s going to buy your used trucks?” Westport Innovations is one of the only companies exclusively devoted to making natural gas-powered trucks, but diversified trucking manufacturers such as PACCARand Cummins are also touting new natural gas-fueled vehicles.
Clean Energy Fuels,the largest provider of natural gas fuel for transportation in the U.S., is teaming up with Pilot Flying J, one of the biggest operators of truck stops, to install liquefied natural gas, or gaseous-based pumps at 150 facilities within two years.
Royal Dutch Shell will invest more than $300 million to create a series of liquefied natural gas filling stations across the U.S. Shell will install 200 LNG pumps at 100 Travel Centers of America refueling stations, a partnership seen as a challenge to Clean Energy Fuels — Pilot Flying J one.
The public sector also stands to gain. Major cities, such as New York and Washington, have invested heavily in gas-powered buses and will benefit from a less volatile market, where prices will no doubt be lower than their recent peak years.
As for losers in the current natural gas race, coal manufacturers will pay dearly if natural gas prices stay low. Utilities are already converting to gas-fired power plants, which are cleaner and more efficient than coal.
Railroads that transport coal will be hurt, too, as they bring 70 percent of the fuel to the nation's power plants, according to the Association of American Railroads, a major trade group. The group estimates that coal accounted for 47 percent of industry tonnage and 25 percent of revenue in 2009.CSX, for example, typically generates around one-third of its revenue from coal shipping.
Producers of liquid natural gas, which is super-chilled and safely transportable, also stand to suffer until more exports are permitted by the federal regulators.
Cheniere Energy recently became the first company to win federal regulatory approval in three decades. But the winds on export policy may soon shift direction. The Blackstone Group is providing a large chunk of the financing.
The industry and Wall Street see new opportunities.
“If we don’t export it, Canada will,” says Robert S. Morris, who covers natural gas production and exploration as a managing director at Citigroup Investment Research.
Disclosures:
Subath Chandra at Jefferies says he “does not believe” Jefferies has any conflicts related to the companies he discussed. He personally owns shares in Halcon Resources (HK) and Magnum Hunter Resources (MHN), neither of which was mentioned in my story.
Regarding Ann Duignan’s recommendations:
J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Westport Innovations, Cummins Inc., and PACCAR Inc.
J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Westport Innovations Inc., Cummins Inc. and PACCAR Inc.
J.P. Morgan received in the past 12 months compensation for investment banking from Westport Innovations Inc., Cummins Inc. and PACCAR Inc.
J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Westport Innovations Inc., Cummins Inc. and PACCAR Inc.
J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Cummins Inc. and PACCAR Inc.
Robert S. Morris of Citigroup holds a long positions in Chesapeake Energy, EOG Resources and Canadian Natural Resources. For more on the firm's business activities, click here.