The United States is on the verge of a crisis over a key strategic resource it once almost completely controlled.
It's a resource that's invisible, but critical to science and industry. MRI machines can't function without it.
Large research labs use it to conduct cutting-edge studies in areas such as particle accelerators and research magnets. It's also essential to scientists conducting research in a wide range of fields, including chemistry, biology, biophysics, nanotechnology, and astrophysics.
It is used in the production of everything from LCD screens to fiber-optic cables to the silicon chips used in PCs, cars, smartphones, and scores of other gadgets.
And all this just scratches the surface.
Trouble is, we're now experiencing a shortage and steadily increasing consumption means the world could completely run out of it in as little as 25 years.
That's a problem because in most cases there is no adequate substitute for it.
What is this critical strategic resource?
Believe it or not, it's helium. And in this case it about quite a bit more than party balloons.
As I'll explain later, there is even a silver lining for investors.
Government Screws up Big Time
The problem traces its roots to when Congress set up the Federal Helium Program in 1925.
Spurred on by the military's use of helium in airships, the program was created for the purpose of stockpiling the gas.
In all, the Bureau of Land Management (BLM) spent $1.3 billion amassing a huge supply of the gas in the Federal Helium Reserve facility near Amarillo, TX.
But the government ended up buying far more helium than it could ever use.
So in 1996 Congress passed the Helium Privatization Act, which mandated the Helium Reserve sell off its supplies and close the facility by the end of 2014.
But instead of selling the helium at market prices, the 1996 law instructed the Secretary of the Interior to set a price based on simply recovering the costs of shutting down the Helium Reserve and the $1.3 billion spent to fill it.
The result was years of artificially low helium prices, which sparked demand and killed the incentive to produce more.
Now the gap between supply and demand has started to force helium prices up. What's more, over the past year, several helium production facilities temporarily went offline for maintenance, creating a shortage that pushed prices even higher.
Today, the private market price for helium is nearly three times what it was a decade ago.
Beyond the near-term distortion caused by the federal government's antics, the helium market faces a bigger, long-term problem: limited reserves.
According to the National Academy of Sciences, the world has enough helium to last for about 100 years at current levels of consumption. But the NAS estimates consumption will rise at about 3% a year at least through 2020.
At those rates, the NAS says, the world will run out of helium in just 40 years. And helium is not renewable – it took radioactive decay 3.5 billion years to generate most of the Earth's underground helium.
The few alternatives – extracting helium from the atmosphere or mining it on the moon – are prohibitively expensive. And most of the Earth's current reserves lie in distant nations not necessarily friendly to the US, such as Russia, Qatar and Algeria.
Concerns over dwindling supply will keep pressure on helium prices even if production ramps up in the short term response to the higher prices.
And that's where the payoff is for investors.
Investing in Helium
With the US government getting out of the helium business – probably sooner than later – the private sector will eagerly step in to fill the void.
Several companies that deal in a wide variety of commercial gases will benefit from rising helium prices:
Airgas Inc. (NYSE: ARG): Based in Radnor, Pa., Airgas has a market cap of $6.51 billion. It has enjoyed EPS growth of 16% a year for the past five years, and analysts estimate EPS growth of 13% for next five years. ARG is up about 27% over the past 12 months. Its P/E of 20 is a bit higher than the industry average of 16.5, but it has a PEG ratio of 1.35, better than its two peers below. It recently traded at $84.42. Airgas pays a dividend of $1.60 for a yield of 1.90%. It has a one-year price target of $96.91.
Praxair Inc. (NYSE: PX): Praxair is the largest industrial gases company in North and South America. It is also the largest of the gas companies, with a market cap of $32.28 billion. PX has had EPS growth of 12.7% for the past five years, projected to be 11% for the next five. Praxair has a P/E of 19.4, and a PEG ratio of 1.86. PX recently traded at $108.33. This stock pays a dividend of $2.20 for a yield of 2%. It has a one-year target of $118.29.
Air Products & Chemicals Inc. (NYSE: APD): Air Products and Chemicals is the world's biggest supplier of helium, though its market cap of $18 billion lags Praxair's. APD has had an EPS growth rate of 11% for the past five years, with analysts predicting a spurt to 14% next year before settling back to about 9% in the following years. While the global economic slowdown has hurt APD, it has the lowest P/E of the bunch, 13.47. However, as the company with the greatest exposure to the helium market, it stands to gain the most in the long run. It recently traded at $84.98. APD pays a dividend of $2.56 for a yield of 3%. It has a one-year target of $95.88.
Related articles and information:
National Academy of Science: Selling the Nation's Helium Reserve
Bureau of Land Management: TheFederal Helium Program
The Washington Post: Congress turns its attention to... America's helium crisis
David Zeiler is associate editor of Money Morning.