Another look at Natural Gas

Natural gas seems to have lost momentum with the seeming collapse of Cap-and-Trade.  California seems like the notable exception on this end.  However, when you look at what the EPA is doing right now you’ll see that the efforts to pull power generation into the arbitrary control of government are very much alive.

A must-read on this issue is the 10/22 WSJ story: The EPA Permitorium http://on.wsj.com/bek5W2

The gist of it is that new regulations on Sulfer Oxides allow the EPA to base the amount released on internal models, which can be arbitrarily changed, rather than physical measurements.  This puts compliance of coal power producers in question and no permits for new or expanded use of coal plants will be issued for approx.  another 18 months.  The article is also fairly convincing in it’s argument that the EPA will effectively phase out much of our coal power production through regulatory measures over the next several years.

I like Natural Gas in this scenario because it’s the only feasible replacement for coal power generation.  Nuclear power is still tied in regulatory knots and it takes a decade to bring new capacity online.  Wind and solar will cost a lot of money but have very limited core power-generating potential, both because of limited reliability and low a power-density (meaning many acres of greenspace used to produce a relatively small amount of power). 

Many NG plants already exist that aren’t fully utilized because the fuel is more expensive than coal, and they are cheaper and easier to build.  I realize that new administrations can change the direction of this policy to again favor coal, but that will take time and NG will be the quickest to benefit in the short to intermediate term.

Many NG related companies have large dividends which is good in this environment.  For tax-protected funds like IRA’s, US firms like PBT and CHK might be good plays.  PDS (focuses on drilling rather than distribution) is good for this as well because it has Canadian as well as US exposure, and it doesn’t have dividends.  For a normal taxable account, I would prefer the high-yielding Canadian firms like PWE because you get a tax credit for the foreign taxes withheld, and the loonie is likely to appreciate against the US dollar in coming years.  ERF, AAV, and PVX are others you could check.

Advertisements

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
This entry was posted in Market Thoughts. Bookmark the permalink.

2 Responses to Another look at Natural Gas

  1. John Walke says:

    For a critique of the Wall Street Journal’s error-ridden and wrongheaded editorial, “EPA Permitorium,” see http://switchboard.nrdc.org/blogs/jwalke/the_wall_street_journal_editor.html.

    • johnonstocks says:

      Interesting commentary on the politics behind this decision. I don’t that it invalidates the market theme of moving from coal to natural gas though … nat-gas does pollute significantly less than coal, and it is a quick, cheap and ready way to switch from coal power. The fact that the EPA is making changes, combined with the current administration’s position on climate change and the success of cap and trade in California, does help tip the scale toward natural gas for power production. Still, thanks for posting this because it is very helpful to hear both sides of the issue.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s