From Mississippi to Pennsylvania and Ohio to Kansas, there’s a gold rush in the natural gas market.
In little Williamsport, Pa., population 30,000, city officials say they have never seen such an economic boom. Long lines at restaurants and sold-out local hotels are the result of 115 new businesses being created over the past three years as natural gas companies come to town to set up shop. Williamsport is now the seventh-fastest growing community in the United States, according to the U.S. Bureau of Economic Analysis.
In southwest Mississippi, prospecting for oil and gas has created 13,000 full-time jobs and more than $500 million in salaries over the last four years alone. Out in south-central Kansas, the story is no different. Land that sold three years ago for $30 an acre is now fetching $3,000, as oil company officials buy up millions of acres of mineral rights.
“Fracking,” or hydraulic fracturing, has revolutionized the search for natural gas in the United States. Using advanced techniques that allow prospectors to drill not only down but sideways through deep shale rock, natural gas explorers are reaching huge pools of otherwise untapped gas, bringing tax revenue, jobs and economic rebirth.
A 2011 study authored by the consulting company Pricewaterhouse Coopers estimates that shale gas recovery might result in one million new manufacturing jobs by 2025. Another study by IHS Global Insight, a country and industry forecasting firm, found that 34% of natural gas harvested in the U.S. is now shale gas, up from 27% in 2010, and projected the figure will grow to 60% in 2035.
With all of this new economic activity also comes investing opportunity. And there is more than one way to play the market. Investors might choose to buy shares in Chesapeake Energy (CHK), a huge player in the natural gas shale market, or a traditional giant like ConocoPhillips (COP). Smaller energy companies just getting their start in the market or service companies like pipeline providers are another way to invest in the sector.
Tyler Kocon, a portfolio manager for Split Rock Private Trading in Duluth, Minn. sees the biggest investing opportunities in smaller companies with under $1 billion in market cap value. He likes Synergy Resources (SYRG), a domestic oil and natural gas exploration and production company, with just 168 wells primarily operating in Colorado, Wyoming, Kansas and Nebraska.
These companies are attractive in part, Kocon says, because they present good buyout opportunities for larger firms. “[They go from] one well to two wells, and all of a sudden they grew 100%,” Kocon says. “That’s what is so exciting about these companies. We think they present themselves as fantastic buyout opportunities for larger companies like Exxon.”
Still, smaller companies without proven records of performance can present greater risks, and Kocon is well aware that he is investing in a volatile sector. “Without a doubt, it’s the riskiest portfolio that we’ve run,” Kocon says.
Corporate performance isn’t the only risk to consider when investing in this sector. Environmental groups oppose “fracking” because they say water used in the drilling process is contaminating water tables and releasing methane, a harmful greenhouse gas. Hydraulic fracturing differs from traditional drilling in that wells are dug deeper and drills are pointed sideways to break up pockets of shale that in turn release latent gas reserves. During the drilling process, millions of gallons of water are pumped down into the drilling holes. The pressure from the water aids in breaking up the shale. Oil companies contend that the contaminated water is so deep at that point — thousands of feet below the surface — that it can do no harm, but many environmentalists believe otherwise.
“The environmental side of it is very scary,” Kocon concedes. “That is the biggest threat to this portfolio. The first time someone messed up with disposal or pumping … would be devastating for our portfolio and other people’s holdings.”