Ever get tired of all the fighting in Washington?
I know I do.
The uncertainty that it’s injecting into the market right now is criminal. This whole debt ceiling fight is entirely a tug of war between the Republicans and Democrats.
But, there is one area where both sides agree… Energy Independence.
Now I know there’s some disagreement there too… but the disagreement’s about the “HOW”, not the “WHY”.
When you step back and look at the energy independence debate, there is one clear winner.
The environmentalists on the left love it.
Face it, Electricity produced from natural gas generates about half the greenhouse gasses of coal. Natural gas is clearly the cleanest burning fossil fuel. For the environmentalists, zero emissions might be the ultimate, but admittedly unrealistic goal.
Big Business on the right loves it too.
Natural Gas is plentiful and cheap. And best of all, we have gigantic reserves here in the US. If Nat Gas goes mainstream, it would be great for suppliers, end users, and all the businesses in between.
Imagine if government fleets of vehicles were powered by natural gas.
Not only would it potentially save money, it would also be “enviro” friendly!
In April, a bill popped up in the House of Representatives with big implications. It would offer tax credits for purchases of natural gas vehicles. And a 50 cent per gallon fuel credit.
If that subsidy or a similar bill passes it would be a game changer!
That’s not the only news we’re seeing in the industry. In early July, General Motors signed an agreement with Westport Innovations (WPRT). In case you didn’t know, Westport is a leader in the design and development of alternative fuel engines… like those used for natural gas!
The partnership is aimed at engineering better natural gas engines, and enhancing controls, emissions, and performance.
Other companies are jumping on the Nat Gas bandwagon already.
United Parcel Service (UPS) and Waste Management (WM) have begun the process of switching their delivery vehicles to natural gas. The engines are significantly cheaper than they were last year.
Why the shift? It’s just good economics. A while back it was estimated natural Gas engines cold recoup an investment in just four years.
JPMorgan recently estimated that when we hit $150 a barrel for oil, the recoup period would plummet to less than six months.
So the question isn’t, “Will natural gas vehicles take off in the U.S.?” The question is, “When?”
Now let me introduce you to a fantastic little company set to profit from the Natural gas trend: Energy Services of America (ESA).
Let’s step back for a moment. You already know the end users of Natural Gas. And it’s pretty easy to find the Natural Gas explorers and drillers… there’s a whole industry around that.
But, have you ever stopped to wonder who built the infrastructure to move the natural gas from the wells to the customers?
Energy Services of America is an infrastructure construction company. They build the guts of the transportation and distribution infrastructure for big energy companies.
They do this with four separate subsidiaries.
C.J. Hughes Construction is a U.S. company specializing in pipeline distribution, transmission and utility contractors. Their designs and projects consist of natural gas, oil, water, and sewage.
ST Pipeline is one of the largest pipeline companies in Appalachia. They fulfill a niche market need of constructing pipeline through steep or rough terrain.
C.J Hughes Pipeline specializes in the construction of transmission pipeline facilities, with an emphasis on natural gas.
And Nitro Electric Company is a “full service” electrical contractor. They specialize in high voltage projects, general power and control, and instrumentation services. They also fabricate and construct pipe.
WHY ESA? WHY NOW?
ESA operates in the eastern states. Areas like the Virginias, Ohio, Kentucky, and Pennsylvania.
If you follow natural gas then you’ve probably heard of the Marcellus Shale formation. It stretches across many of the states that Energy Services operates in.
Hydraulic fracturing, or fracking, is growing in popularity. Because of that these shale deposits are becoming more attractive.
Fracking is the process of shooting high pressure liquid down a drill hole. It essentially fractures and breaks up the rock. This process releases trapped natural gas and drastically increases extraction rates and recoverable reserves.
Once the wells are drilled, somebody needs to build the pipeline to move the Natural Gas.
And remember, these guys own ST Pipeline. They’re prepared to lay pipe in areas other companies would balk at.
As fracking and drilling of the Marcellus shale increases, ESA is sure to see an uptick in business. Also, as Nat Gas prices climb, the greater the demand will be for ESA services as well!
Now, let’s look at the numbers.
We all lived through 2011, and we all experienced the crazy weather first-hand.
Lots of rain, snow, and flooding. Unfortunately ESA operates in a lot of the heavily affected areas.
Remember, they’re laying pipe. That work has to be done outside. Mother Nature threw some serious roadblocks their way. And it shows up in the numbers.
The 2010 numbers for ESA looked good. The company generated $218 million in Revenue, and pushed $5.7 million to the bottom line. Like I said – good numbers.
Now 2011 had a rough start… and Chairman Marshall Reynolds admits it. He stated “the first two quarters of our fiscal year are normally challenging.”
That’s clear from the numbers.
The company only generated $143.4 million in revenue and lost $5.3 million for their fiscal year ending in September 2011.
Despite the rough numbers, the rest of the financial statements are looking solid. They have over $111 million in assets and $56.1 million in total Liabilities.
With 2011 finally over, I have high hopes for the numbers going forward. Because of how poor the earnings have been, the company valuation is very attractive right now…