A Tipping Scale Still Favors Natural Gas

by David Fessler, Investment U Senior Analyst
Friday, September 9, 2011

This past April 21, according to Baker Hughes Inc.’s (NYSE: BHI) weekly rotary rig count, the number of rigs drilling for oil surpassed those drilling for natural gas.

Back in May, I wrote an article on the big shift away from drilling for natural gas in favor of oil.

At the time, there were 984 rigs drilling for oil. Just a couple of months later, on June 24, the count reached 1,003. That was the first time since Baker Hughes began separating the oil and gas rig counts in 1987 that the 1,000 mark was breached.

Its latest report confirms the frenetic pace at which companies have shifted to oil drilling. In its August 26 report, Baker Hughes indicated that 1,069 rigs were spinning away in search of black gold.

Check out the graph courtesy of the Energy Information Administration (EIA) below.

A Drilling Shift: Natural Gas vs Oil Rigs

Ever since January 2009, the number of oil rigs has steadily risen. Will it continue?

The Continuing Divergence Between Natural Gas and Oil Prices

The continuing divergence in price between natural gas and oil favors this outcome. Oil continues its choppy march back towards the $90-a-barrel range, while natural gas remains below $4 per million BTU.

It’s no wonder that not only has the switch occurred, but the rig gap also continues to widen. The low price for natural gas has utilities scrambling to build new power plants that run on it. They’re locking in supplies while it’s cheap.

What they’re really doing is building a floor under the price. You won’t see natural gas going lower from here. In fact, if Chesapeake Energy Corporation (NYSE: CHK), Clean Energy Fuels (Nasdaq: CLNE) and a few other companies I follow in my Peak Energy Strategist research service have anything to say about it, the price for natural gas will start to rise over the coming months.

That’s because Chesapeake and Clean Energy fuels have teamed up. The two companies, fueled by a $150-million investment by Chesapeake in Clean Energy, have agreed to build a natural gas “refueling highway.”

The initial phase calls for the installation of 150 natural gas refueling stations at some of the nation’s largest trucks stops. They will be strategically located across the United States, adjacent to major interstate trucking routes.

They aren’t waiting for Congress to pass the Natural Gas Act. They see natural gas as the future transportation fuel, eventually supplanting gasoline and diesel.

Are they early? You bet. Most Americans aren’t even aware of what they’re doing. But when the tipping point is reached, you can bet that there will be a groundswell of activity in dozens of companies in the natural gas sector.

After all, the nearly 170,000 gas and diesel fueling stations will all begin to be retrofit with natural gas pumps, as well. That will cost about $1 million per station. That’s a lot of job creation, revenue generation and profits for those companies involved in the build out.

The investment opportunities will be unprecedented. You can bet the two I mentioned above will be right in the thick of things. And shareholders who get in before the tipping point occurs will be pleased as punch a few years from now.

Good investing,

David Fessler