Chesapeake To Make Nat-Gas Key For U.S. Energy Policy, Finally (CHK, CLNE, WPRT, KMP, XOM)

After markets closed yesterday, Chesapeake Energy Corp. (NYSE: CHK) announced a plan to create a $1 billion venture capital fund to promote increased demand for natural gas by replacing petroleum-based products. At the same time, the company announced its first two investments. Clean Energy Fuels Corp. (NASDAQ: CLNE) will receive $150 million in three equal tranches of $50 million to build liquefied natural gas refueling stations. The second investment of another $155 million goes to Sundrop Fuels, Inc., a maker of biofuel derived from cellulosic material, in which Chesapeake will take a 50% interest.

Westport Innovations Inc. (NASDAQ: WPRT), a technology provider for engines that run on natural gas, hydrogen, and other biofuels, is another potential beneficiary of Chesapeake’s venture fund. Natural gas producers such as Exxon Mobil Corp. (NYSE: XOM), which now claims the nation’s largest natural gas reserves due to its acquisition of XTO Energy, and Devon Energy Corp. (NYSE: DVN), another major onshore natural gas producer, stand to gain from Chesapeake’s investment as well.

While Chesapeake’s announcement was couched in terms of saving the US from the nefarious deeds of OPEC, natural gas producers have go to do something to lift the price of natural gas to a point where they actually make a profit on the gas. Right now, producers are relying on the oil and natural gas liquids that they can produce as their profit-making products. In order to make a profit on gas production alone, producers need a price above $6/thousand cubic feet, about 25% above today’s price.

Abundant reserves of shale gas make it hard to get any kind of price boost. Production in the Marcellus shale in Pennsylvania and New York has lowered transportation costs for natural gas to the most populated region in the US. Even Kinder Morgan Energy Partners LP (NYSE: KMP) is considering spending several million dollars to reverse the flow of its Rockies Express pipeline which now carries natural gas from Wyoming and Colorado to the eastern US.

Chesapeake and other gas producers need to find more uses for natural gas than simply generating electricity and fueling home heating and cooking. Compressed and liquefied natural gas for transportation, particularly in over-the-road trucks, could provide a solid boost to demand and Chesapeake is trying to prime the pump.

The venture investment of $1 billion over 10 years is already one-third committed, and the projects that have been funded are really just a small drop in a very large bucket. Chesapeake should get credit for what it’s doing, but a lot more is needed if the US is going to replace a significant amount of imported oil with any alternative fuel.

Chesapeake shares closed yesterday at $29.75, within the stock’s 52-week range of $19.68-$35.95. But it’s worth remembering that three years ago the stock was approaching $70/share. That’s where the company would like to be again.

Paul Ausick