Roberto Cominotto, a fund manager of the JB Energy Transition Fund at Swiss & Global Asset Management, has these comments to make on what he calls a “golden age for natural gas”, a view driven in part by significant developments in the US.

Editor’s note: Roberto Cominotto, a fund manager of the JB Energy Transition Fund at Swiss & Global Asset Management, has these comments to make on what he calls a “golden age for natural gas”, a view driven in part by significant developments in the US. The issue is also politically sensitive given the forthcoming US presidential elections in November.

Energy policies are high on the agenda for the US elections in November, and natural gas is a hotly-debated topic. There are three key areas of debate:

-- Hydraulic fracking – a natural gas extraction method – has been banned in Vermont and others may follow suit as regulation begins to bite within the sector. Both parties are in favour of the method, but the Democrats are likely to call for increased regulation.

-- Both sides are likewise generally supportive of natural gas vehicles, but the Democrats favour incentives for drivers making the move to this fuel, while the Republicans are opposed.

-- Export of natural gas – both parties are pro-exports, although policies remain restrictive until a full assessment of the implications for prices can be made.

So why is this such a hot topic, and why should investors consider the sector?

Natural gas is regarded as a “bridge technology”, which can be used in the transitional phase until renewable energies can cover the global population’s requirements. Various governments are planning to make increased use of natural gas to reduce emissions and make the most of its attractive price, currently at record lows in North America.

The release of harmful emissions such as carbon monoxide, nitrogen oxide, sulphur dioxide, mercury and particulate matter is only a tiny percentage of the comparable quantities of oil and coal - a positive step in reducing emissions. 

Strong growth in demand

Natural gas is used for heating, generating electricity and in the manufacture of chemical products. In the key producer countries, a significant proportion of road vehicles are also powered by natural gas. Natural gas accounts for around 23 per cent of the global energy mix, but there are marked regional differences. Russia and certain Middle Eastern countries lead the way with around 50 per cent. At the other end of the scale are nations such as India (10 per cent) and China (4 per cent) that are experiencing exceptionally strong growth in energy demand and are tackling the ecological and health consequences of coal and oil combustion. It therefore comes as no surprise that these countries are keenly interested in the cleanest fossil fuel available. China is aiming to increase the proportion of natural gas in its energy mix to 10 per cent by 2020, rising strongly over the long term.

How can investors profit?

There are many industries linked to the natural gas value chain. At the start of the chain, there are technologies for the exploration and extraction of natural gas, and also the producers. Then come the companies that refine, process, transport and store the natural gas, as well as their suppliers. At the end are the natural gas utilities, power plants, and natural gas-powered vehicles.

Given that the natural gas prices in North America are likely to remain low, and could even fall further over the medium term, investors should steer clear of companies that would be hit by lower prices, including first and foremost the natural gas producers. Meanwhile, shares in companies that will profit from rising gas volumes are interesting. These include providers of the drilling and production technologies, for example Helmerich & Payne, that make it possible to find and tap into new sources. Providers of equipment for transporting and storing natural gas will also benefit from rising volumes. This is especially true in the case of liquefied natural gas (LNG), where suppliers of equipment for liquefying, shipping and regasification of LNG like CBI or Chart Industries offer potential for investors. Providers of gas turbines for new natural gas power plants such as Siemens are also attractive.

Natural gas-powered vehicles are still considered a niche market, but there are significant growth opportunities. The best opportunities exist in manufacturers of natural gas-powered engines for example Westport Innovations, and operators of chains of natural gas filling stations like Clean Energy Fuels.