This Commodity the Next Big Trade in Energy Stocks?

In many cases, companies in transformative industries can, at times, offer significant value—and natural gas is no exception.

At this time, I see a large amount of potential upside in this commodity. While there has been a lot of hype around electric vehicles and other alternative energy sources, I believe natural gas will play an increasingly larger role in our economy.

There are several reasons why I believe this, including the fact that the fossil fuel is quite abundant in North America; it burns clean, so it’s better for the environment than coal or oil; and it’s relatively affordable.

Now, in the trucking industry, there has been a significant shift toward natural gas-powered trucks. This includes all kinds of vehicles, from long-haul to garbage trucks.

As an example, Waste Management, Inc. (NYSE/WM) currently operates more than 2,200 of these vehicles and is continuing to convert its fleet away from diesel-powered trucks. The company recently opened its 50th natural gas fuel station. (Source: Waste Management, Inc. web site, last accessed November 25, 2013.)

The benefits are obvious, as Waste Management reduced its consumption of diesel by 8,000 gallons per year, while also cutting 22 metric tons of greenhouse gases. The lower costs for operating these vehicles and the reduction in environmentally harmful emissions are huge benefits for using this commodity as a power source.

When it comes to looking at energy stocks in the natural gas sector, we have to be careful, as there are a variety of operators. Some energy stocks are extremely young and are still incurring losses as they expand production facilities. Because natural gas prices still remain relatively low, one has to be careful when considering smaller energy stocks, to ensure they are able to operate at current price points.

In contrast, larger energy stocks tend to have a well-built infrastructure and positive cash flow. These types of energy stocks provide upside potential, while also helping to reduce risk as compared to startup companies.

This type of investment in natural gas energy stocks should be considered as a long-term endeavor. It took many years for oil-powered vehicles and fueling stations to gain prevalence across the country when they were first introduced to the industrial and broader consumer markets.

Of course, we can’t simply assume that natural gas will be powering every truck tomorrow. However, I believe over the next decade, this is a legitimate power source for both the utilities industry, as well as the trucking industry.

Natural gas energy stocks that are currently holding large reserves and have well-established distribution networks should benefit over the next few years.

One company that I’ve been keeping my eye on is Encana Corporation (NYSE/ECA, TSX/ECA). This Canadian-based energy company is a leader in the field of natural gas, natural gas liquids, and oil.

The company has a variety of different properties and products that they are able to extract, offering a measure of stability versus some of the smaller energy stocks that only have one property and are producing just one commodity.

Many energy stocks that are only focused on natural gas have languished, as the commodity itself has been trading in a wide range over the past year, as indicated in the chart below.

Chart courtesy of www.StockCharts.com

But this is short-term thinking. Obviously, energy stocks will benefit if natural gas prices were to rebound. Looking out over the next few years, as more natural gas-powered trucks hit the market and as utilities begin to prefer this commodity to coal, I expect prices to begin trending higher.

If that’s the case, energy stocks will benefit from the higher average realized price of natural gas on the market. This is a multiyear, once-in-a-generation shift that will result in significant profits for energy stocks, meaning investors should keep an eye on this sector for possible investment opportunities.

This article This Commodity the Next Big Trade in Energy Stocks? was originally published at Investment Contrarians

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