Natural gas isn’t PC, but it’s the future
‘WHEN E.F. Hutton talks,’’ went the old ad slogan, “people listen.’’ Not anymore. The legendary investor and his namesake firm are long gone, and with them the idea of placing blind faith in your financial adviser. The financial crisis of 2008, market collapse in 2009, and stagnant economy today have created a generation of skeptics - and an excuse for 1960s nostalgics to roll out the protest anthems. But even amid the chaos, Wall Street has something to say: “Everything you’ve been told about energy is wrong.’’
On its face, the recent announcement that Kinder Morgan would acquire El Paso Energy was just another big energy merger. The combination will be America’s fourth-largest energy firm, and largest operator of gas pipelines - over 65,000 miles worth. But every deal has a story behind it. As Kinder Morgan’s share price soars, the markets are sending a message about our economy, our energy future, and the power of innovation. But it’s not the one you’ve been hearing for the last decade - at least not from politicians and the politically correct.
Despite a tough national environment, investors still see an opportunity for long-term returns in natural gas, banks are willing to commit capital, and the industry is hiring. The combined firm will employ over 12,000 people. Plus, this isn’t a case of bankers doing a deal just for the sake of ginning up fees. The gas pipeline business is capital-intensive, and it’s growing: The industry estimates that over $150 billion in new construction will be needed during the next 20 years.
That projection tells us something about the underlying resource as well. While many analysts, political pundits, and doomsayers continue to talk about “peak oil’’ and the end of fossil fuels, technology has passed them by. Hydraulic fracturing has been around for 50 years, but when combined with the latest technology for underground modeling and mapping, it has unlocked vast new domestic gas formations. Over just the past two years, the government’s Energy Information Administration has doubled its estimates of recoverable shale gas in America.
It’s noteworthy that Kinder Morgan and El Paso don’t sell gas; they transport it. So it’s fair to assume that the value perceived by shareholders, lenders, and suppliers is long-term; no one builds $150 billion worth of pipeline unless the availability, flexibility, and cleanliness of gas will continue to drive demand for decades. And therein lies the message to President Obama and Energy Secretary Steven Chu: This is the future of energy in America. Not hydrogen fuel cells, not massive solar arrays, not some fanciful carbon-free coal.
That doesn’t mean that alternative energy has no future. It’s a big economy, and there will always be applications for solar, geothermal, and biomass that make sense. But over the next 25 years, the lion’s share of new commercial facilities and electricity production - and a growing share of trucks and buses - will be powered by gas. That’s precisely what CEO Richard Kinder saw when he began assembling his company from unwanted and underutilized assets in the 1990s.
Even in bad times, innovation and entrepreneurship can drive productivity and job creation. Fifteen years ago, Kinder Morgan didn’t exist. If the acquisition of El Paso is approved, the combination will have an enterprise value of close to $100 billion. It has happened without government subsidies, stimulus spending, or loan guarantees; and over the last few years, it has happened in an environment where the price of natural gas has actually declined.
These are the messages the marketplace is sending if we care to listen. It’s a message that investors, customers, and thousands of employees already have heard - but one that many in America don’t want to hear. Not the White House that has poured billions into uncompetitive alternatives; not the Malthusians who have forever preached that fossil fuel reserves would soon be exhausted; and not the media that have so willingly parroted these conjectures as though they were gospel.
The lack of attention hasn’t bothered Kinder much. He didn’t wait for the government to divine an “energy policy’’ for him. In the best traditions of the American spirit, he went out and built it himself. Announcing the deal to employees, he took shots at the Russians, President Obama, and even fee-hungry bankers.
When Kinder talks, people might not always like what they hear, but they should probably listen.
John E. Sununu, a regular Globe contributor, is a former US senator from New Hampshire.