The debate on our nation’s dependence on oil has been a major issue for quite some time now. Crude oil is a finite resource, and one that we will eventually run out of–though estimates of just how long that will take stretch across the board. But as the largest consumers of crude (roughly 7.3 million barrels per day) in the world, and with 51% of our oil coming from foreign nations, the U.S. will eventually be forced to face its addiction to crude head on. From here, many experts and analysts have their own opinions as to which resource would be the most environmentally friendly and cheapest alternative. While alternative sources of power such as wind and solar energy have been in the works for years, these industries face considerably hurdles still before becoming economically viable.
In recent years, natural gas has gained momentum as a viable piece of the domestic energy equation thanks to the high profile efforts of a number of individuals and organizations. Natural gas is already a major energy source for homes all across the country, as over half use some form of natural gas to run appliances like stoves, water heaters, and clothes dryers (in 2009, about 25% of domestic energy was derived from natural gas). But as a fuel for automobiles, natural gas is a relatively new concept. Liquefied natural gas (LNG) has slowly been gaining popularity as a fuel for cars, though less than 1% of all vehicles currently utilize this method. In order to help promote this clean-burning– and abundant– alternative to gasoline, Congress has proposed The New Alternative Transportation to Give Americans Solutions of 2011, aka the NatGas Act 2011 [see also Natural Gas ETFs: Seven Ways To Play].
Inside NatGas 2011
The NatGas Act “provides incentives for the use of natural gas as a vehicle fuel; the purchase of natural gas fueled vehicles; and the installation of natural gas vehicle refueling property,” writes Ryan Gray. The bill will provide numerous provisions such as a tax credit of up to 80% of the cost of buying a natural gas vehicle. This could include vehicles that utilize both natural gas and another fuel for power, as well as those that exclusively use natural gas. The bill will also extend the current 50 cent per gallon credit on LNG. Tax incentives will also be offered for manufacturers of natural gas as well as those involved in the fuel’s infrastructure. The proposed bill make sense, as the EIA has reported that the U.S. possesses 2.55 quadrillion cubic feet of natural gas resources (this compared to the modest 22.84 trillion cubic feet that was consumed in all of 2009). If natural gas companies are able to tap into these major reserves, supplies could skyrocket in a relatively short period of time [see also Natural Gas ETFs: Investing In The Fuel Of The Future].
With the possibility of a viable alternative to oil on the horizon, and possible legislation to push it to the forefront, investing in the natural gas sector has become increasingly popular. There are a number of ETFs that offer exposure to natural gas in various ways, including direct ownership in futures contracts, equities that are involved in gas production and exploration, and gas-focused master limited partnerships (MLPs). Below, we outline three natural gas option to keep an eye on as NatGas 2011 makes its way through Congress in the coming weeks:
United States Natural Gas Fund (UNG)
UNG is one of the most popular ETFs, as nearly 16 million shares change hands on an average day. This ETF invests in front month natural gas futures, rolling holdings on a monthly basis. That strategy creates some meaningful contango-related headwinds for long-term investors, but also results in increased correlation with spot prices over the short run. As the huge ADV figures indicate, UNG is more of a trading vehicle used by those expressing a short-term outlook than it is a buy-and-hold security [see also Strange Times For The Natural Gas ETN (GAZ)].
First Trust ISE-Revere Natural Gas (FCG)
This product offers exposure to natural gas indirectly, investing in companies that derive a substantial portion of their revenues from the exploration and production of natural gas. The underlying index is an equal-weighted index that considers, among other factors, historical correlation to natural prices in selecting component stocks. FCG holds over 85% of its assets in U.S. equities, with the other allocations going to companies in Canada, the UK, and Norway. The passing of NatGas could be major boost for FCG, as many of its 31 holdings would be eligible to receive a tax benefit based on their production and manufacturing on natural gas.
E-TRACS Alerian Natural Gas MLP Index (MLPG)
MLPG is an exchange-traded note linked to the Alerian Natural Gas MLP Index, which provides investors with a benchmark for the infrastructure component of the natural gas industry. Top holdings in this product include Copano Energy LP, ONEOK Partners LP, and El Paso Pipeline Partners LP, companies that are engaged in the pipeline transport primarily of natural gas. Increased usage of natural gas would boost demand for the assets owned by MLPG components, potentially allowing these companies to charge higher “tolls” to transport fuel through the tollways (i.e., pipelines) they own. While many products in the MLP ETFdb Category are involved in the storage and transfer of petroleum-based products, MLPG is a purer play on natural gas.
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Disclosure: Photo courtesy of Adam E. Moreira. No positions at time of writing.