As the price of oil approaches $100 a barrel and many forecasts call for even higher prices later this year, the push for clean alternatives in the United States continues to gain momentum. Many of these alternatives have limitations in their ability to produce consistent energy or are too cost prohibitive, which minimizes broad acceptance. However, one domestic source of clean, cheap, abundant energy is Natural Gas. Studies estimate that the US now has a 100 year supply of Natural gas due to new drilling techniques in previously untapped shale formations. The abundance of Natural gas is not limited to just the United States. Many of the same gas laden shale formations exist around the globe in countries such as China, Russia, Canada, Australia, and the middle east to name a few. Russia, the world's biggest gas producer has huge deposits. Canada could have a 1000 year supply. Australia is just now tapping their huge surplus by exporting it to Asia in the form of Liquid Natural Gas, or LNG. The Middle East has also invested in LNG processing plants so that they can now export the fuel that before had to be either flared off, or re-injected back down into the ground. Even Israel has recently found huge deposits of Gas off their coast that now exceed 100 years of supply.
As a result of this huge abundance of gas, its price is cheap relative to other energy sources. To quantify the valuation of natural gas, we created a ratio by dividing the price of a barrel of oil by the price of an MCF of natural gas. Other than a brief spike in 1990 following Iraq’s invasion of Kuwait, the ratio of natural gas to oil has historically been between 5 and 10 times, which make sense since a barrel of oil has approximately 6 times the energy content of a MCF of natural gas. In the past several years, the rise in the price of oil has caused an unprecedented disparity in this ratio to about 23 times making natural gas much cheaper comparatively.
We believe that fast growing developing economies, OPEC supply constraints, and lack of Position Limits on Commodity Futures markets will continue to keep oil at a high price relative to Natural Gas. So we think uses of Natural Gas will grow dramatically in this country because it is clean, cheap, domestic, abundant, would put American's to work, and reduce the amount of energy imports from the Middle East to name a few. It makes incredible sense!
We have identified several companies that we believe are at the tipping point for expanding the use of Natural Gas for transportation and energy conversion. We believe these companies will prosper as this country embraces this domestic resource.
Sincerely,
Larry Chlebina
President
Chlebina Capital Management, LLC
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