Could Natural Gas Cars Fuel Chesapeake’s Growth?

The abundance of natural gas caused by the shale gas boom has dramatically altered the US energy landscape. Natural gas companies are now targeting the transportation sector as the next big demand driver, and it’s not hard to see why. The transportation sector accounts for about 70% of US oil consumption and contributes to about a third total carbon dioxide emissions. Garnering a share of the transportation pie could drastically boost demand for natural gas.

As America’s second largest natural gas producer and one of the largest in terms of proven reserves, Chesapeake Energy (NYSE:CHK) has a vested interest in developing natural gas demand in the transportation market. The company’s natural gas business accounts for about 40% of its value according to our estimates.

Why Is Natural Gas Attractive For The Transport Market?

Natural gas is one of the cleanest burning hydrocarbons, having carbon dioxide and carbon monoxide emissions that are about 25% and 97% lower than oil, respectively. ^[1] The fuel is also cheaper than gasoline with prices at around $1.50 to $2 less per gallon-equivalent compared to gasoline. ^[2] Gas-powered vehicles also offer lower running and maintenance costs, which could further reduce the total cost of ownership for automobile users.

Gas is also abundantly available in the United States which has abundant natural gas reserves. As of 2010, the US imported about 11% of its natural gas reserves and the imports are expected to decline going forward as shale gas production picks up and now the country is looking to export natural gas. In comparison, oil imports stand at around 45%. Substituting oil with natural gas will improve the United States energy autonomy. This could encourage the US government to extend its support for natural gas in the transportation sector.

Who Is Converting To Gas ? What Are The Obstacles It Faces In Adoption?

Some large bus and truck fleet users including UPS and Waste Management are transitioning all or some of their fleets into natural gas. Governments and transit companies  have also been transitioning some of their vehicles to natural gas. However, getting a larger base of automobile users to adopt the fuel will hinge on growth of the refueling infrastructure. While the US has a strong natural gas pipeline network, the number of refueling stations for natural gas is still abysmally low at just around 600 countrywide. In contrast, the number of gasoline filling stations is around 160,000. ^[3]

The industry faces a chicken and egg problem in this regard as many auto manufactures including GM and Ford have been reluctant to sell gas powered vehicles in the US due to lack of refueling infrastructure. At present, the Honda Civic Natural Gas is the only model that comes factory fitted with the natural gas option, although aftermarket conversion options do exist.

What Is Chesapeake Doing In This Space And How Can It Benefit?

Chesapeake  has been taking steps to improve the supply infrastructure across the United States. Last year, the company invested $150 million in Clean Energy Corp, a company that constructs and operates liquefied natural gas fueling stations for trucks. The firm currently operates most of its outlets in the major trucking corridors across the US.  Chesapeake also introduced “CNG In A Box” in partnership with General Electric, which is targeted at petroleum retailers. ^[3] The product offers a plug and play solution that makes it easy for retailers to quickly install and sell compressed natural gas.

To build demand for natural gas vehicles, Chesapeake has partnered with 3M (NYSE: MMM) to develop compressed natural gas storage tanks for the transportation sector. The storage tank is the most expensive component of the CNG system in vehicles, and reducing this costs will serve to bring down the overall costs of adoption of CNG-based vehicles.

Transportation currently accounts for just about 0.1% of total US natural gas consumption while electrical utilities in comparison accounted for about 31%. ^[4] This offers a lot of room for growth.  An increase in natural gas demand from the transportation sector will drive up Chesapeake’s natural gas production volume and could also positively impact the company’s natural gas price. If gas prices increase to about $6 per billion cubic feet (bcf) at the end of Trefis forecast period while natural gas production volumes rise to about 1.4 bcf , it could yield near 10% upside to our price estimate for Chesapeake.

We have a price estimate of  $20.60 for Chesapeake Energy, Which is about 18% ahead of the current market price.

Understand how a company’s products impact its stock price on Trefis

1. Natural Gas and the Environment, NaturalGas.org [↩]
2. Natural Gas Drillers Target US truck, Bus Market, Yahoo Finance [↩]
3. ref 2 [↩] [↩]
4. Natural Gas Consumption By End Use, EIA [↩]