Insights on the Natural Gas Industry

Hennessy Gas Utility Fund Portfolio Manager Ryan Kelley discusses the health of the natural gas industry and the growth opportunities from electric power generation and exportation. He also explains how a rising interest rate environment may impact the Fund.

June 2018

  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Portfolio Manager
 

Ryan Kelley: In many ways the natural gas industry is as strong as it ever has been. Natural gas is an abundant resource. We have over a hundred years of supply, all within our political control. It's in many ways the fossil fuel of choice from an environmental point of view. We think that there's still a lot of growth in the natural gas industry, and we've seen record levels of production, record levels of consumption, and record levels of exportation in the past year. 

Electricity Generation

Natural gas has steadily been replacing coal as the fuel of choice in large-scale power plant electricity generation in the United States, for about a decade now. And this has been one of the largest contributors to the growth and the use of natural gas over the past decade. Coal produced about 45% of the nation's electricity back in 2010. Now in 2018, it's projected it will only be about 29%. Meanwhile, natural gas will produce about 34% of our electricity this coming year. We think that this trend will continue for quite some time as older power plants are taken offline, as current power plants are converted to natural gas, and as new power plants come online, which burn natural gas as well.

Exportation of Natural Gas

Natural gas exportation is very impactful to the industry over the long term. Last year in 2017 for instance, for the first time ever, the United States was a net exporter of natural gas, and we primarily export natural gas via pipelines to Mexico as well as LNG tankers, or liquefied natural gas, which we ship around the world. Right now there are only two LNG export facilities in operation, there are nine that have been approved, there are five that are under some part of construction at this point. But we think that in 2020, natural gas exportations could be about 10% of the overall production of natural gas, and by 2022, the United States could be the largest exporter of natural gas in the world.

Rising Interest Rate Environment

We've taken a look at the Hennessy Gas Utility Fund and its total return per year, over the past almost 30 years since inception, versus the changes in interest rates. And we found a very low statistical correlation between the two. Now one difference right now is that we have had low rates for a very long time, so that puts us in a little bit different situation than we've seen in the past. However, right now the fund is yielding about 2.7%, and 48 of the 52 companies in the Fund pay a dividend. And so they're growing their dividends about 5% per year, on average, for the past three years. So, although investors often leave utilities during rising rate environments, we think that there are still compelling reasons to own this Fund from the dividend point of view as well as potential price appreciation.

Current performance and 30-Day SEC Yield of the Gas Utility Fund can be found here.