Bill Perkins, an energy trader by profession, accomplished some unusual goals last year. His Houston firm, Small Ventures U.S.A., invests in commodity markets for a hedge fund; the firmâ€™s transactional volume is in the billions. The niche he knows best is natural gas, a fossil fuel used to heat homes and to generate much of the nationâ€™s electricity.
But thatâ€™s not how Perkins gained notoriety. Last September, when Lehman Bros. Merrill Lynch, and AIG were all succumbing to the mounting pressures of the mortgage crisis, Perkins leaped at the chance to buy Goldman Sachs at $105 a share. When the price surged to $130 a share, he cashed out, pocketing $1.25 million. Perkins wasnâ€™t done making a splash. He used the profit to buy full-page ads in The New York Times and Wall Street Journal protesting banking industry bailouts and lampooning President Bushâ€™s economic advisers as â€śnew Communists.â€ť â€śI had a problem with rich guys getting bailed out,â€ť Perkins explains. â€śYou canâ€™t go into a boxing ring and ask that no one knock you out, just as you cannot go into markets, take risks, and expect a handout at the end.â€ť
Perkins makes a habit of profiting from the unconventional. Besides trading in energy futures and acquiring wireless spectrum rights, his firm has forayed into venture and angel investing. Recently Small Ventures funded a wind farm in Nicaragua. It also became the lead player in a project to fund a natural gas power plant in El Salvador, the largest infrastructure investment of its kind in Central America since the 1914 opening of the Panama Canal.
This year, thereâ€™s one investment Perkins is promoting more than any otherâ€”one with guaranteed return and little risk: â€śWhenever my friends ask, I say eliminating energy waste in their homes is the equivalent of a AAA+ investment. It could cost $30,000 in some cases, but it locks in yearly returns between 10% and 20% or higher.â€ť As for the financial markets, Perkins spies a few good opportunities in his stock-in-trade, the natural gas industry.
What do you like about the natural gas sector right now?
Well, thereâ€™s a condition in the natural futures market called contango. That means future contracts for the purchase and delivery of natural gas are changing hands at higher than current prices. That presents a good opportunity for companies that have enough capital to continue in natural gas exploration. If you do the math, itâ€™s apparent that the current environment offers the possibility of making very attractive returns.
How so, exactly?
Right now, the spot price for natural gas is $6.30 per million British thermal units or BTUs, a measure of energy used in the power, heating, and cooling industries. Over the next few years, however, we see that price venturing upwardâ€”contracts for 2010 delivery right now are fetching $7.27, while 2011, 2012, 2013, and finally 2014 are bringing in $7.42, $7.32, $7.25, and $7.24, respectively. Thereâ€™s clearly a markup above the industryâ€™s drilling costs and the price of replacing reserves.
Whatâ€™s causing natural gas prices to spike?
A number of factors are at workâ€”you canâ€™t pinpoint just one or two. First off, natural gas prices came down with oil this past summer and are possibly working off lows as more production capacity comes on the market. When natural gas was trading at prices as high as $10 per million BTUs last April, U.S. producers caught on. They are ingenious and efficientâ€”thatâ€™s a testament to homegrown technology. They brought on massive increases in production through the use of breakthroughs such as horizontal drilling. That said, natural gas is primarily used in the production of electricity, so demand for natural gas may increase with higher electricity usage. It is also sensitive to hot and cold weatherâ€”demand may increase with extreme temperatures.
So, how do you use that information to place value on a natural gas stock?
Combine two things: the present value of the production on acreage a natural gas company owns, and the estimated value of future production. Right now, there are very good companies that have valuable properties, yet are selling at a discount to the worth of their production. One example is Contango Oil and Gas Co. (MCF). The company has one of the largest shallow-water natural gas discoveries in history, in offshore Louisiana, yet the stock is undervalued compared to the companyâ€™s future cash flow. The downside, of course, could be volatility in the natural gas market.
Whatâ€™s another producer you like?
Chesapeake Energy Corp. (CHK) is another outfit with a great portfolio of potentially high-yielding acreage. The company is a leader in shale [a type of natural gas] production with great assets. An example is its production in Haynesvilleâ€”a field located in east Texas and northwest Louisiana. One of the nationâ€™s richest deposits is Barnett Shale in North Texas. Additionally, the company has shored up its balance sheet in order to be cash flow positive, a plus in this environment.
Are there alternative energy investments that catch your eye right now?
Sociedad QuimicaÂ y Minera de Chile (SQM) is a specialty minerals producer that may profit from an explosion in demand for lithium. In the next five years, it looks as if auto producers will put significant effort into developing lithium-powered cars. Sociedad is well-run and also has a solid business in the production of potassium nitrate for fertilizers and minerals for upscale pharmaceuticals as well. But this is certainly one company that would benefit from the push toward electric-powered vehicles.
This article originally appeared in the March 2009 issue of Black Enterprise magazine.