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While the supply of crude oil in exotic locales such as Venezuela and Saudi Arabia have become common dinner time conversation, few currently understand the biggest noise in the energy market is coming from a different direction. The Natural Gas market is up 7x from its lows just a few years ago, eclipsing the gains made by crude oil. While The Commodity Investor believes that purchasing Natural gas contracts is a great way to play this market over the next decade, perhaps an alternative strategy would be to make an investment in El Paso Corporation (NYSE: EP). In terms of bringing fossil fuels to market, oil drilled underground has distinct advantages compared to natural gas. Crude oil can be drilled off the coast of Venezuela, put on a ship sent to New Orleans and then placed on tankers to get to your local Exxon. Natural gas, because it is lighter than air, evaporates very quickly. It also occupies huge amounts of space in gas form and is inefficient to ship long distances because of the massive volume it occupies. To bring gas to market, 2 possibilities exist - an underground network of tunnels crisscrossing thousands of miles finally ending at the doorstep of each house or shipping it in liquid form by cooling the gas to -260 degrees. Obviously, neither of these possibilities are cheap, but both are being done. Currently, there are 56,000 miles of gas pipelines traversing under the ground of the United States, an investment that costs billions of dollars and decades of time.
El Paso is the largest owner of these natural gas pipelines, with over 1/3 of gas being used in the United States every day passing through a pipe owned by El Paso. Because of the prohibitive cost of digging up thousands of miles of dirt and laying down extra pipes, there is unlikely to be any competition in markets that are already supplied with natural gas. This makes the United States very dependant on companies like El Paso for heating and generation of electricity, despite the fact that few people have even heard of the company. In California, a few years ago, a breakdown between El Paso and some of its customers saw prices shoot up by a factor of 10 in just a few weeks. In 2003, El Paso became too big for its britches had to declare Chapter 11 bankruptcy. The aggressive approach by its management in an attempt to dominate the world market in natural gas led to enormous accumulation of assets all across the world, but a correspondingly big debt load which it found itself unable to service. Wall Street pounded the company, sending its shares down 96% and forcing El Paso to sell off virtually all of its assets outside the United States. Today, the company has restructured and even continued to expand its network of underground pipelines in the US. Although it has completely exited the Asian market, arguably the greatest potential for growth, it now produces 4% of America's daily use of natural gas while transmitting 1/3 of all the country's gas through its pipelines. In addition, Shell has just signed an agreement with Qatar to import natural gas in liquid form into its Elba Island facility, which is serviced by El Paso Corporation. This could effectively enhance El Paso's market share of gas transmission significantly. Meanwhile, its stock has started to recover, although it is still down 80% from its high a few years ago. Currently, the company trades around $12.25/share, equal to its prices in 1994 when natural gas prices were only $2 compared to $13+ today. Although still under a lot of debt, the value of its assets are, even after restructuring, at a phenomenal level. Today, Wall Street values the company at $8 Billion dollars. If a single investor were to buy all the shares at this price, sell all its assets, and pay down all the debt, that investor would have doubled their money just like that. With the great growth potential of natural gas going forward, the distribution of it will be critical. This is one company who has the infrastructure in place and a virtually monopoly on the distribution of it through many parts of the country. While many stocks involved in this sector have already become Wall Street darlings, El Paso may be the one company that is currently undervalued in this space. |
