COLUMN-Investing in longer, hotter summers
By John Wasik
CHICAGO Aug 30 (Reuters) - As the global climate increasingly provides the setting for a sweltering Tennessee Williams tragedy, the best way to invest for the future may be in two unglamorous industries: Natural gas and electric utilities.
Long-term demand for both looks promising. If global warming proves to be a long-term trend, as many scientists predict, utilities will be good buy-and-hold candidates. They have traditionally paid healthy dividends.
Even if you don't consider the record heat, devastating storms and wildfires as harbingers of things to come, it's clear that for electric utilities, all of those air conditioners running full blast this summer was good for business.
A fellow traveler on the road to higher energy consumption is the natural gas industry. An ongoing revolution in natural gas recovery through fracking (in which fluids are forced at high pressures into rocks to free gas) and other methods in the U.S. are creating a burgeoning energy supply, as prices have dropped to record lows. While these controversial technologies may pose environmental harm, the gas they produce is less malignant than petroleum or coal-based combustion. Burning natural gas has a significantly lower carbon footprint than its fossil-fuel cousins.
More good news for this sector would be a global move into cleaner, lower-cost energy solutions; particularly if governments embrace a wider climate-change agenda. The International Energy Agency (IEA) recently called for some $36 trillion in utility investments worldwide to lower the cost of energy by some $150 trillion by 2050.
Combined with more stringent U.S. environmental rules, these developments are driving the electric-power industry to convert an increasing number of energy-generating plants from coal to cleaner natural-gas burning units. In just five years, the IEA projects gas will be generating about as much electricity as coal.
These developments have prompted the IEA to proclaim the "golden age of gas in North America." Natural gas combustion by U.S. power plants is expected to rise 20 percent this year, according to the U.S. Energy Information Administration. More growth is expected next year, as more factories and commercial facilities use gas-produced power. China, the world's second-largest economy, is expected to more than double natural gas consumption over the next five years thanks to ample supply and lower prices, the IEA estimates. The overall gas trade is expected to rise 35 percent in the next half decade.
As the United States develops more international markets for its gas and builds more liquefied gas export terminals and pipelines, prices should eventually rise. Growth will be fed by teeming cities in tropical and sub-tropical zones that crave more electrical power and air conditioning as they become richer.
There's also significant savings to be reaped by industries that process or burn natural gas. Assuming prices can remain competitive with crude oil, cheap gas can reduce the cost of everything from steelmaking to fueling the family sedan.
The gas industry's growth has offered robust employment and the prospect of boosting the nation's export economy. Add to that the promise of energy independence and you have a political formula that's working well for the industry despite the many environmental concerns.
For a concentrated play on natural gas, consider the Fidelity Select Natural Gas fund (FSNGX.O) that invests in all aspects of gas production, transmission and distribution.
A combined portfolio can be found in the Utilities Select Sector SPDR (XLU), which invests in an index of power producers, energy traders and gas utilities. The fund yields 3.8 percent. The Vanguard Utilities (VPU) ETF and the iShares S&P Global Utilities Sector Index fund (JXI) are good alternatives.
For those seeking a broader energy exploration and natural resources portfolio, the T. Rowe Price New Era mutual fund (PRNEX.0) is a worthy consideration. The fund includes a variety of oil and gas producers.
Utilities stocks hold two major wildcards. If Congress decides to raise the tax rate on stock dividends -- they are currently at 15 percent -- that will hurt shares. And any threat to demand -- such as a global recession -- will pinch prices if supply exceeds the demand. Gas-production company shares plummeted after the 2008 meltdown as the recession curbed demand. Natural gas has dropped in price some 80 percent since 2008. Like any commodity, gas prices will continue to be volatile.
Given growing demand for energy in Asia, Africa and South America, and affluent populations buying more air conditioning units and electricity in the future, gas and utilities companies should continue to warm your portfolio returns for years to come. They are long-term plays that should be more than seasonal favorites.
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