Last week, I told you where to find 57% of America's best income stocks.
For those who didn't read that article, my research team found that 12 of the 21 best-performing American income stocks of the past decade came from a single sector -- energy. (You can get the entire list of the 21 income stocks and their performance here.)
The success of energy stocks in the past decade makes sense. After all, in the unpredictable world of investing, energy consumption just might be the only sure thing. We've only had one annual decline in the past 30 years -- and even that was a mild 1.1% dip in 2009, as the global economy regained its footing.
But what if I were to tell you that right now, the vast majority of energy users are overpaying for it?
It's a crazy thought. After all, who would pay $3.50 per gallon of gasoline when you can go across the street and pay $3.25?
I certainly wouldn't and I doubt you would either. When given the choice of two similar goods at different prices, consumers gravitate toward the cheaper one almost every time.
But consumers are also set in their ways, as are many business executives. And over the decades, we've grown accustomed to oil as one our chief energy sources. So accustomed, in fact, that we're now overlooking a cleaner, plentiful alternative that is about 75% cheaper.
The graph below tells the story:
This graph shows the price of crude oil versus the price of an equivalent amount of energy from natural gas during the past three years.
A barrel of oil contains about six times the raw energy content of a thousand cubic feet (Mcf) of natural gas. So all things being equal, with oil prices about $99 per barrel, natural gas should fetch about one-sixth as much, or $16.50 per Mcf.
But thanks to horizontal drilling and fracking technologies, the United States is now awash in accessible, cleaner-burning natural-gas resources. And the resulting flood of natural gas has created a surplus, causing prices to collapse.
Right now, natural gas prices are currently languishing at $3.80 per Mcf. Multiply by six, and you see that it costs less than $25 to get an equivalent amount of energy from natural gas as you get from a barrel of oil. So on an energy-equivalent basis, natural gas is roughly one-fourth the cost of oil.
Natural gas isn't just readily available at a 10% or 20% discount to oil -- but more than 75%. These economics are simple but powerful. It's hard to justify paying $1 for an energy source when you can buy something comparable for $0.25.
And in fact, we're already starting to see a major shift toward the use of natural gas.
For the first time in 15 years, there's currently an expansion wave in petrochemical manufacturing (which uses natural gas as a feedstock). We're also beginning to see many fleet owners convert their cars and trucks to vehicles that run on compressed natural gas (CNG) transportation fuel -- which is about $2 cheaper per gallon than ordinary gas or diesel at the pump.
And as for electricity, the U.S. Department of Energy is forecasting that natural gas will fuel 90% of the additional power-generating capacity scheduled to be built in the next two decades.
But the real opportunity for energy investors rests in something called liquefied natural gas (LNG).
By chilling natural gas to -260 degrees Fahrenheit, production companies can liquefy and compact the energy source, making it economically feasible to ship large quantities overseas.
Now U.S. oil and gas companies can ship their excess natural gas as LNG to foreign markets -- where natural gas is scarcer and widely commands prices of $10 to $15 per Mcf, and in the case of Japan, nearly $20 per Mcf.
Events have already been set in motion to allow our cheap shale gas to be liquefied and sold abroad. Needless to say, selling billions of cubic feet of gas for triple the price they might get here in the U.S. has major producers like Chesapeake Energy (NYSE: CHK) seeing dollar signs. And there are plenty of hungry customers out there.
Just a few years ago, only 17 countries imported LNG worldwide. Today, this number has risen to 25 -- not counting Poland, El Salvador, Costa Rica and many others that are planning to build LNG import terminals.
As a result, global annual LNG production has spiked 60% since 2005. And with an estimated $200 billion in capital being poured into expansion projects worldwide, this trend isn't stopping anytime soon. Case in point: global giant Chevron (NYSE: CVX) recently pledged to put 40% of its investment capital into new LNG projects in the next decade.
I expect the use of LNG will become more widespread. There's already been a flurry of headline-grabbing deals as savvy industry execs wake up to the potential.
Action to Take --> Keep your eyes on what's going on in the energy patch. Right now, the price of natural gas relative to oil is way too cheap to ignore... and the growth in LNG is still in the early stages. It's only a matter of time before more and more investors start to catch on.