How to invest in natural gas

Natural gas as a fuel is cleaner than coal and oil, but isn’t without its controversies, like fracking. Still, it’s going to be a key energy source for years to come. So, how does an investor get exposure to natural gas in their portfolio?

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Natural gas

Oil is a finite resource, and despite a surge in US oil production in recent years, in most places it is getting more expensive to pump dwindling supplies of our main source of fuel out of the earth. With pressure on oil, the search for other energy sources is picking up pace, and as part of this there is a huge amount of investment going into natural gas.

Oil giant Royal Dutch Shell, for example, is running a $14 billion, 25-year project to extract liquefied natural gas (LNG) off the coast of Australia using a vast floating rig. Other oil majors including ExxonMobil, BP, and Total also have their own natural gas projects underway.

When we think of natural gas, we think of a cleaner form of energy, although it may not be as green as we imagine, given that burning it as fuel still creates carbon dioxide (CO2). But, it generates an estimated 30% less CO2 than oil, and 50% less than coal. Although it is a fossil fuel and non-renewable, this is why you may find natural gas in investment funds that consider themselves ‘clean’ energy funds.

Natural gas has been quite controversial, and has made many headlines, largely because of fracking. Widespread in America, hydraulic fracturing or fracking is the practice of drilling into the ground and blasting a high pressure mixture of sand, chemicals and water to break apart the rocks that contain shale gas. Critics claim it is environmentally damaging, not only to the landscape but also because of the risk of chemicals leaching into the groundwater. It can also be noisy and disruptive for people who live in and around fracking areas.

Fracking in the UK

Fracking has become more prevalent in the UK since former Chancellor of the Exchequer, George Osborne, tried to kick off a shale gas revolution in the UK, similar to that in the US. The aim was to make the economy more energy self-sufficient, while driving down energy prices.

Shale gas is now at the heart of the government’s energy strategy, and described as ‘absolutely vital to the economy’. ‘The government believes that shale gas has the potential to provide the UK with greater energy security, growth, and jobs,’ it said in a recent report. ‘We are encouraging safe and environmentally sound exploration to determine this potential.’

Natural gas provides about one-third of the UK’s energy supply, both in terms of domestic use, and for industry. But, since 2004, the UK has been a net importer of natural gas, and the government wants this to change. 

Natural gas certainly looks like an interesting growth story. If you want your portfolio to benefit, there are several ways to do it.

Shares

We have seen that the oil majors are investing resources in natural gas, so you could buy their shares as a play on this theme. Braver investors may prefer to look for exploration companies that are directly engaged in fracking. These could include British oil and gas extractor and developer IGas Energy, or Egdon Resources, another British firm focusing on UK-based onshore production and exploration. Both these companies are listed on AIM, London’s market for young companies.

Internationally, there’s Australian publicly-listed company Liquefied Natural Gas Ltd, or in the US there’s NW Natural, which is listed on the New York Stock Exchange (NYSE), and has an underground natural gas storage facility in Oregon.

One less direct route into this sector could be to buy companies that offer services to the exploration companies, such as FTSE 250-listed Scottish company Weir Group, or Natural Gas Services Group in the US, which both provide pressure control and other equipment and services to the natural gas industry.

Funds and trusts

A good way to get some exposure to natural gas as part of the wider energy theme could be to buy an actively managed fund or investment trust specialising in just that sector. New City Energy investment trust, Ashburton Global Energy fund, and Pictet Clean Energy fund all count natural gas investments within their portfolios.

Exchange-traded products

There are many exchange traded products (ETPs) on the market which can give you low cost exposure to natural gas. You can find a good selection on IG’s online trading platform, including exchange-traded funds (ETFs), exchange-traded notes (ETNs), and exchange-traded commodities (ETCs). Bear in mind some of these use leverage, and should be handled carefully by sophisticated investors. You could also choose a broader clean energy ETF for exposure to other areas of the energy market, as well as natural gas, potentially spreading your risk.

Use our screener to find the right ETFs for you.

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