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Cleanest Fossil Fuel Is Wall Street's Bet on Climate Change

By Jim Polson
May 09, 2014 12:00 AM EDT 177 Comments
A natural gas valve at a hydraulic fracturing site in South Montrose, Pennsylvania.
Photographer: Spencer Platt/Getty Images
A natural gas valve at a hydraulic fracturing site in South Montrose, Pennsylvania.

Wall Street’s idea of investing in climate change means investors are piling into natural gas, the least polluting fossil fuel.

Energy accounted for almost two-thirds of the $8 billion of inflows into sector-based exchange-traded funds this year, according to data compiled by Bloomberg. In the absence of federal mandates for renewables such as wind and solar, much of that money is going into funds that invest in natural gas drillers.

The fuel that produces less pollution than coal and oil is the most obvious beneficiary of global warming, which a White House advisory panel said on May 6 is already blighting the U.S. with coastal flooding, heavier rainstorms and more intense wildfires. The potential for hotter summers and colder winters will raise energy demand, and that suggests higher gas prices.

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“They’re predicting more weather extremes,” said Skip Aylesworth, who helps manage $5 billion at Hennessy Advisors Inc. (HNNA) in Boston, including its gas utility index fund. “Weather extremes are good for the energy business. More energy use, better for the earnings.”

Climate change is proving to be a boon for energy investment. On the day the National Climate Assessment report was issued, the 44-company Standard & Poor’s Energy Index reached a record, and $322 million of cash flowed into exchange-traded funds that specialize in energy.

As of yesterday, $5 billion had flowed into energy ETFs this year, 17 times more than in the final quarter of 2013. Energy took 63 percent of the net flow into all sector EFTs.

Policy Benefits

Natural gas companies also will be the first beneficiaries of President Barack Obama’s climate policy, which has consistently discouraged the use of coal without requiring renewables to be used as a substitute, said Stephen Smith, executive director of the Southern Alliance for Clean Energy in Knoxville, Tennessee.

“Natural gas is a potential bridge to new technologies that are green or clean,” said David Mazza, a strategist at State Street (STT) Corp. Its Energy Select Sector SPDR (XLE) Fund is this year’s top performer among sector ETFs, and its SPDR S&P Oil & Gas Exploration (XOP) EFT ranks third. “That’s had a positive impact on investor interest.”

Gas producers EOG Resources Inc. (EOG) and Anadarko Petroleum (APC) Corp. were the top performers among the S&P 500 after they reported better-than-expected first-quarter earnings on May 5. Nabors Industries (NBR) Ltd., which drills for oil and gas in North American shale basins, is this year’s best performing stock in the S&P 500.

Coldest Winter

Bad weather was good to U.S. utilities in the first quarter. They beat earnings estimates after the coldest winter in three decades stoked demand for electricity and gas. Similarly, the rise in prices that accompanied stronger winter demand helped Chesapeake Energy Corp. (CHK), a gas producer, boost profit to $425 million from $58 million a year ago.

The expectation for worsening weather is just one more reason to invest in gas. Gas producers already were buoyed by forecasts that Europe will turn to the U.S. for supplies as Russia, stokes military tension with Ukraine, said Donald Coxe, who advises on $190 million at Coxe Advisors LLP in Chicago. Russia is Europe’s biggest supplier, and most of those supplies flow through pipelines in Ukraine.

“The total market for North American natural gas has been transformed in two months,” Coxe said. “A thousand cubic feet of natural gas in the ground for delivery five years from now is probably worth 30 percent more than it was.”

Pipeline Winners

Companies that distribute gas are also winners. Largest proportional inflow into exchange-traded funds on May 5 was at First Trust North American Energy Infrastructure Fund (EMLP), which owns pipeline companies, gas distributors and utilities. Almost $114 million poured into the fund, equivalent to 21 percent of its value, according to data compiled by Bloomberg.

Market-beating gains haven’t been restricted to oil and gas. Total returns year to date are 99 percent for the Guggenheim Solar (TAN) Energy Index ETF, and 55 percent at First Trust Global Wind Energy Fund (FAN), according to data compiled by Bloomberg.

It’s risky to base investment decisions on global warming, since the outlook for more volatility in the weather means accurate predictions will become harder to forecast, Smith said.

“Extreme can mean an exceptionally mild winter or an exceptionally cool summer,” Smith said. “It means climate becomes less predictable. That’s going to make planning difficult for power companies.”

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Reed Landberg

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