Playing the shale gas boom - Chart Industries

June 7 Fri Jun 7, 2013 7:00am EDT

June 7 (Reuters) - What a difference a decade makes.

Ten years ago, Chart Industries Inc was on the verge of bankruptcy after taking on too much debt during a spree of acquisitions that included an equipment maker for storing cryogenic liquids like liquefied natural gas.

Today, those products, as well as others that are used to make, transport and store LNG, have made Chart a winner in the U.S. shale gas boom and transformed the company into a darling of those seeking to cash in on the push to use natural gas as a fuel for transportation and industry.

Over the last few years, investment firms including Artisan Partners Asset Management Inc, Vanguard and BlackRock have acquired stakes of more than 5 percent in Chart, and they have enjoyed quite a ride. The stock has doubled in the last two years, including a 43 percent gain in 2013 alone. Some on the Street have signaled that it may be time to take profits, but big hitters in the stock are sticking with it.

"We think this is really just beginning," said Jim Canty, a portfolio manager with Clough Capital Partners in Boston, calling Chart "close to a pure play on the natural gas boom."

The rapid growth in shale gas output thanks to hydraulic fracturing has brought new investment in plants to produce LNG for both domestic and overseas consumption. But to move natural gas, it first must be supercooled into liquid form.

Enter Chart, which makes heat exchangers and tanks used in making and storing LNG. The company's products are also used in LNG fueling stations, which companies like Clean Energy Fuels , ENN Group and Royal Dutch Shell Plc are building in the United States for the small but growing number of natural gas-fueled trucks. Chart also make tanks that are used on those vehicles, rounding out its unique presence all along the LNG-for-transport supply chain.

Chart, which has a market capitalization of more than $2.8 billion, is the No. 1 or 2 supplier in all of its main product lines and has little direct competition among publicly traded companies, according to analysts.

Sumitomo, Linde, Air Liquide, Air Products & Chemicals, Fuel Systems Solutions Inc and Westport Technologies compete with Chart in some areas, but many are also Chart customers.

Each of those stocks has gained this year, most in the double digits. But still those increases pale before Chart's more than 40 percent rise.

Many of its competitors are larger and have more financial resources than Chart. But barriers to entry are high in the LNG equipment industry, analysts said, because of the complexity of cooling gas to 260 degrees below zero Fahrenheit and then storing it. As a result, Chart is sometimes raised as a potential takeover target for General Electric, in particular, as the conglomerate has bulked up its oil and gas equipment division, most recently with its deal to buy oilfield pump maker Lufkin Industries.

Chart is also becoming a major player in China, which is farther along in its adoption of natural gas as a transportation fuel. The company earlier this year landed two contracts worth a combined $85 million to provide equipment to PetroChina Co Ltd .

"You are sitting on a relatively small company that is right at the center of one of the primary trends in world energy," said Jonathan Compton, managing director of London-based Bedlam Asset Management, which has more than $700 million under management and began buying Chart stock more than a year ago.

"You can't deny that the stock price is pretty fully valued, but you have got a huge number of imperatives behind this stock."

ROOM TO RUN?

Chart shares, which trade at more than 20 times analysts' expectations for 2014 earnings, are relatively expensive. The average multiple for companies in the industrial machinery industry is about 13.5, according to Thomson Reuters data.

And some investors, such as Wells Fargo, have decreased sizeable positions in the past year.

The stock should be trading at $57.80, far below Thursday's closing price of $95.04, according to Thomson Reuters StarMine's intrinsic value model, which considers analysts' growth estimates for five years and then projects that growth trajectory over a longer period of time.

Bedlam's Compton said analysts are underestimating the company's earnings potential over the next three years, though he added that quarterly numbers could be "lumpy" given that revenue from big projects will vary from quarter to quarter.

Longdley Zephirin, an analyst at the The Zephirin Group, estimates Chart is overvalued by about 30 percent and recommends investors take profits. A slowdown in orders from PetroChina after this year's build out of fuel stations, storage tanks and trailers for LNG could trigger a selloff, he said.

Chart expects additional orders from PetroChina and said the company would increase its market share in China, Chief Executive Sam Thomas told analysts in an April conference call. He added, though, that the Chinese market is competitive.

There are other risks as well.

More than a dozen companies are seeking permission from the U.S. Energy Department to send LNG abroad, but some lawmakers have warned the nation risks trading away the economic advantage of its abundant natural gas reserves if it approves unlimited exports.

If there are delays in permitting liquefaction plants or the rollout of LNG-fueled trucks slows, Chart could start to look like less of a sure bet.

The adoption of natural gas as a transportation fuel "may not happen in the accelerated timeframe that the stock may be anticipating," said Colin Rusch, an analyst with Northland Securities.

Yet many on Wall Street believe Chart is still a good buy. Of sixteen analysts surveyed by Thomson Reuters I/B/E/S, 11 have "buy" or "strong buy" recommendations, while the remaining five rate the stock a "hold." Zephirin, who has a "sell" rating, is not included in that data.

Analysts' mean price target is $93.21, slightly below its current level. The highest target price is $114 by Raymond James analyst Pavel Molchanov, who initiated coverage of the stock last month with an "outperform" rating.

Clough Capital, which has about $4.2 billion under management, bought Chart stock a little more than a year ago and had 130,800 shares at the end of the first quarter. The firm has no plans to back out now, according to Canty.

"We think we can hold it for multiple years," he said.