People ask me all the time: “Is natural gas good for America?”
My answer is always a caveat-laden: “Yes, and no. It depends on who you ask.”
And then I add a question to the question: “And at what price?”
Stakeholders of the natural-gas industry are varied. You have exploration and extraction companies… mid-stream transport operators… wholesalers… retail end-users… not to mention the technology and engineering firms that figure out the details of getting gas from underground to market.
Yet, nearly all stakeholders share one thing in common: their ability to profit from natural gas depends on the commodity’s price.
Natural-gas producers want high prices. End users want low prices. And ancillary businesses likely want a goldilocks scenario where natural-gas prices are low enough to make it a ubiquitous commodity, with diverse and deep markets, but high enough to ensure drillers are motivated to extract the stuff.
The Dow Chemical Company (NYSE: DOW) provides a unique lens for viewing the made-in-America natural-gas story currently unfolding. That’s because the 116-year-old, Michigan-based chemical producer has actually figured out how to play both sides of the natural-gas pricing game.
As the world’s second largest producer of ethylene — the most basic chemical building block of nearly any manufactured product you can think of — Dow’s profit margins are fattened by cheap natural gas, which it must buy to produce ethylene.
On the other hand, as much as Dow has decried exporting America’s newfound energy source, it quietly has an ownership stake in the Freeport LNG export facility. Securing one of a small handful of U.S. Department of Energy approvals, Freeport and Dow may be one of the first partnerships to send made-in-America liquefied natural gas overseas… as soon as 2017.
Subscribers to Boom & Bust already know a bit about Dow’s double-talk, hand-in-both-cookie-jars game. I recommended buying Dow’s stock in September 2012, when it was trading for just $30 a share. Since then, we’ve earned open gains of nearly 50%.
Have a look at Dow’s stock price, which has increased seven-fold since the March 2009 bottom.
Not only has Dow’s stock been an outperforming winner for the Boom & Bust portfolio, it’s also provided a smoother ride to profits than investing in natural gas directly.
The United States Natural Gas ETF (NYSE: UNG) is nearly twice as volatile as Dow’s stock, with an average daily range equal to 2.8% of its price, whereas Dow’s average daily range is a more steady 1.7%.
If you’re interested in capturing profits from the burgeoning natural-gas industry, but not willing to ride out the whipsaw volatility in natural-gas prices… consider an investment in The Dow Chemical Company (NYSE: DOW) instead.