Shale gas operations in the United States are expected to push the country toward energy independence in the years ahead, but their impact on U.S. and Canadian share prices could be just as profound.
Moody's Investors Service is a big believer in the drilling revolution – which untaps enormous gas reserves using new "fracking" technology – and argued in a new report that it will keep gas prices low, and quantities plentiful, for at least the next decade. And that will create corporate winners that stand to benefit from the lower input costs that cheap natural gas provides.
"A surplus of natural gas production will give North American refiners and chemical producers a long-term competitive advantage over their peers worldwide, while the shale boom also improves the credit profiles of U.S. electric and gas utilities," said Steven Wood, managing director at Moody's, in a statement.
He mentions names. Among refiners set to benefit: Phillips 66, Marathon Petroleum Corp. and Valero Energy Corp. Among chemical companies that are singled out, fertilizer producers received the biggest nods, given the importance of natural gas to their production. These companies include CF Industries Holdings Inc., Agrium Inc., Methanex Corp. and Rentech Nitrogen Partners.
As for regulated utilities, Mr. Wood points out that natural gas represents their single largest expense – and while cheaper energy is usually passed on to customers, the lower utility bills of customers translates into better relations between utilities and regulators.
"Indeed, the currently more amicable environment has helped the utilities improve their cost recovery through base-rate increases, with little impact on overall customer bills," he said.
Even railroads stand to benefit from the shale boom. "The western railroads Burlington Northern and Union Pacific Railroad will see the most advantage, since they are close to the Bakken and Eagle Ford shale regions," Mr. Wood said.
These energy-producing regions require vast amounts of fracking sand and other materials, and railroads are ideally positioned to provide them.
The question is to what extent has this shale revolution already been priced in to share prices?
While a number of fertilizer producers have been fumbling in 2013, refiners have enjoyed a good run: Valero is up 22 per cent and Marathon is up nearly 21. Among the railroads, Union Pacific has risen more than 22 per cent. Even utilities, which aren't usually associated with stellar returns, have risen more than 12 per cent this year.
However, the gains are largely associated with an investor preference for relatively stable, defensive industries as the global economy shows few signs of anything but sluggish growth. This demand is likely overshadowing any sort of bullish enthusiasm for the shale revolution – which has its share of critics (and not just vocal environmentalists who advocate alternative energy).
For example, Arthur Berman (no relation), a prominent energy consultant and researcher based in Texas, has argued that gas prices would have to rise considerably to make most shale gas production profitable.
"We do not dispute that the shale gas resource is large; we question the near- to medium-term supply, the amount of shale gas that is available on demand," he wrote earlier this year. "The number of gas-directed drilling rigs has plummeted in the past year because of low price and we fear that demand may exceed supply unless this trend is reversed."
These doubts can rankle the shale industry. But investors should love them: As long as doubts remain, the shale revolution has further to run.
David Berman