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Industry Masquerading as Art? I like it.
I have been thinking about natural gas a lot. My appreciation of natural gas as a potential domestic energy source might have blinded me to human shortsightedness. This entire industry is rising to maturity on depressed prices that was created from a rapid increase in supply and a lack of demand. Does that create the potential of making companies with questionable business models look appealing? How many of these companies are prepared for a rise in prices of natural gas?
There are a few reasons I am not too worried about it, but it is an important enough question that it warrants mention. So a company like Linn Energy (LINE) might suffer if it has a series of poor contracts to hedge the price. However, a company like Westport Innovations (WPRT) might do really well, since the current lull in prices is driving adoption of its technologies. I really like Westport, and management impressed me with its commentary during the last earnings call. They gave a nice industry wide picture. I would love to see some commentary about the effect of rising prices.
Clean Energy Fuels (CLNE) is another company that I like, and the effect of rising natural gas prices would be pretty awful, but only if it happens quickly. Once the conversion takes place, slightly higher prices will not completely destroy the company. CLNE is building the fueling stations. So if natural gas prices rise then the price at the pump will rise. If there is already a large fleet of natural gas vehicles then there will be built in value. Growth will decline drastically. However, oil is volatile so don’t discount the benefit of natural gas. The point is that natural gas needs to stay cheap for a while, but not forever. Eventually it can rise, though I would worry if it was pricier than oil.
Another thing about Clean Energy Fuels and a lot of these natural gas companies is that the benefits of all their initiatives will not be evident until at least 2013, and I’m going to be a pessimist and say 2014. Thankfully, Westport is doing fine now, but CLNE will take some time to really pay off. There still are not enough natural gas vehicles on the road.
It is always good to take the good with the bad. I really like natural gas, but it is worth being cautious. Oil will be replaced though, both in the short-term and the long-term. So just keep an eye on the big risks.
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