The Growth of the Natural Gas Industry

Hennessy Gas Utility Fund Portfolio Managers Ryan Kelley and Josh Wein discuss the growth in production and consumption of natural gas and explain why the U.S is on pace to become the world's largest exporter. They describe how infrastructure spending can drive earnings and how portfolio companies have grown their dividend over time.

September 2019

  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Co-Portfolio Manager
 

Ryan Kelley:
Natural gas is a very important part of the overall energy landscape in the United States. It's been growing in importance over the last decade or more. Due to advances in drilling technologies, we're able to extract more natural gas at a more affordable price. Over the last 10 years, production has gone up by 4% per year. In fact, last year, we produced 11% more than the prior year. Consumption has been very substantial. It's grown by about 2.5% per year for the last 10 years1. In many ways, natural gas has become the fuel of choice for the nation.

Natural Gas Exports

Josh Wein:
With the surge in the domestic production of natural gas has come a pronounced increase in natural gas exportation. Over the last decade, natural gas exports from the United States have grown in about a 14% annual rate. In 2017, the United States became a net exporter of natural gas. Over the next 10 years, it's anticipated that liquefied natural gas terminal capacity will increase tenfold2. As a result, the United States could become the largest exporter of natural gas in the world.

Infrastructure Spending Drives Earnings

Ryan Kelley:
One way that utilities can augment their earnings is by spending more essentially. The higher capital expenditures that a company has means that they're reinvesting in their businesses. They're replacing pipelines. They're modernizing their systems. They're making them safer. This is something that utilities need to do over time. When they spend more, they can pass those costs along to customers and make between an 8% and 11% return on their investments. While we've had an outsize growth in earnings per share over the last five to seven years, we think that will continue going forward as well.

Dividend Growth

Josh Wein:
For investors looking for a consistent stable source of income, we would encourage them to look at the Hennessy Gas Utility Fund. Over the last five years, the companies in the fund have grown their dividend at about a 5% annual rate. Over the same time period, this has been supported by operating income growth of about 9%. We feel that the underlying cash flows of the companies in the fund should support future dividend growth for years to come.