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Is natural gas the “Admiral Ackbar” of investments? It sure seems like many analysts want us to think so.
But I think they’re missing out on a big opportunity
Just how big? Even if you’re not a “Star Wars” fan, bear with me for just a moment to borrow from it to illustrate just how big the opportunity that lies before us really is.
Then we’ll look at how easy it can be to profit from what looks like the most-important energy source of the future, starting right now.
In the Star Wars sequel “Return of the Jedi,” the rebel fleet tries to spring a surprise on the evil emperor and his new Death Star II, “Jedi Boogaloo.” (Well, that wasn’t the real name of the second Death Star. But it would have been cool.)
Anyway, as soon as the rebel fleet drops out of hyperspace, ready to blast the new Death Star, they find out that it was all a set-up by the emperor. The emperor had schemed to lure the rebels to their doom by giving them a “too good to be true” opportunity.
That’s when Admiral Ackbar shouts the famous line: “It’s a trap!”
How to Avoid a (Supposed) Nat-Gas Trap
Well, for starters, there is no trap when it comes to natural-gas. But many big-money investors might lead you to believe that there is.
After all, many of these stocks are dirt-cheap and those “in-the-know” guys usually don’t like competition. They’d rather sell their shares to you when prices have already taken off!
Here’s what you need to know now about investing in natural gas.
The price of natural gas is still near the lows it hit last year. And one analyst after another is lining up to warn us that this is a trap — that prices can’t stay this low forever.
This implies that investors don’t need high natural-gas prices. Indeed, many of my recommendations in this space have done quite well with this fuel trading at bargain-basement prices.
And frankly, if you’ve got stocks that are making money even when natural gas is cheap, imagine the upside you can collect when—not if—prices start to take off in earnest?
I do think that natural-gas prices will head higher over time. But I think they can stay lower for a lot longer than many analysts believe possible.
And that gives us plenty of time to make money.
Certainly, natural gas has been on a roller coaster ride. The spot price traded above $13 in 2008, and dropped below $2 last year. It’s well off its low … but also off the recent highs it hit late last year.
What the naysayers point out is that recent prices are below the operating costs of natural-gas wells. They quote ExxonMobil’s CEO, who famously said last year that “we are losing our shirts” selling natural gas at such low prices.
Sure … sure. That’s why ExxonMobil made $126.72 billion in net profit last year. If that’s losing your shirt, show me where I sign up!
I’m not saying that ExxonMobil is making money on natural gas. What I am saying is that it makes enough money on other parts of its business that it can take a loss on natural gas for a long time to come.
But never mind Exxon. How about the smaller producers?
If natural gas is so horrible to produce, surely those companies are going out of business and production is going down, right?
Let’s look at a chart …
In fact, production of natural gas in the Marcellus and Eagle Ford basins is surging. Domestic supply continues to displace pipeline imports from Canada, and is up 25% in the past five years.
So how can energy producers pump MORE natural gas when they’re “losing their shirts”?
Simple: It’s thanks to the boom in oil!
Natural gas pumped as a byproduct of oil and other liquids was 75% of the increase in natural-gas production in 2012 and will account for 90% of increase this year.
All that production has nowhere to go. That’s because Liquefied Natural Gas (LNG) export terminals haven’t been built yet. So, the average wholesale price for natural gas fell significantly throughout the United States in 2012 compared to 2011.
The price for natural gas fell from an average $4.02 per million British thermal units (MMBtu) in 2011 to $2.77 per MMBtu in 2012 — the lowest price since 1999.
Inventories of working natural gas in storage remain at high levels, after setting an all-time weekly record in November.
Production of natural gas has kicked into overdrive thanks to new technology that allows us to extract oil and gas previously inaccessible in “tight” deposits and shale-rock deposits.
And the shale-gas boom isn’t stopping …
The Energy Information Administration projects U.S. natural-gas production to increase from 23.0 trillion cubic feet in 2011 to 33.1 trillion cubic feet in 2040, a 44% jump.
Almost all of this increase in domestic natural-gas production is due to projected growth in shale-gas production, which grows from 7.8 trillion cubic feet in 2011 to 16.7 trillion cubic feet in 2040.
I don’t know about you, but that doesn’t look like a short-term trend to me.
Warm Winter Puts a Lid on Nat-Gas Prices
In the short term, natural-gas producers can’t catch a break. We’re having a mild winter, which is depressing seasonal demand for natural gas as a heating fuel. This winter isn’t over, but last year — which was also a warm winter — saw demand drop by 4.7%.
My analysis is that natural gas should trade in a range between $3.20 and $3.70. We could see a spike lower if demand plummets or if supply jumps higher. And on the high end, any rally over $6 is probably going to be met with new production, which will then bring prices lower again.
And guess what? At $6, North American natural gas is still a huge bargain compared to the prices in Asia and Europe, which are double that and more. So, those companies making profits off of low natural-gas prices should still do pretty well.
There are other ways natural gas is used. It is a chemical feedstock for nitrogen-based fertilizers, and companies that produce these products are already reaping big rewards on cheap gas.
The same can be said for chemical manufacturers, steel producers and more. And those are some of the companies I’m looking at for my subscribers.
Coming Down the Pike: Nat-Gas as a Transportation Fuel
These industrial users of natural gas is one area where I expect natural gas demand to go higher. Another is in transportation.
Natural gas is used as Compressed Natural Gas (CNG) to power cars and Liquefied Natural Gas (LNG) to power big trucks. Research firm Pike Research says that North America’s CNG vehicle growth rate is currently 10% and should keep growing at this rate through 2019.
And there are also new ways that natural gas is being used in oil production. That’s one of the new technologies that I’ll also be exploring with my subscribers.
Speaking of LNG, America is building terminals to export it. Exports should start late in 2015 and really start booming in 2016. Maybe then we’ll see a sea change in the price of natural gas.
But do you want to sit on your hands until 2016? There’s a lot of money to be made right now, for those with the guts to go for the glory.
As for me, I’m going to trust my research, use the force and aim for planet-sized profits. Oh, and I’ll also use lots of fundamental and technical analysis. Because, hey, I may be a “Star Wars” fan, but I’m no dummy.
There are great investments out there, just waiting for the taking, but you’ve got to be careful. If you’re doing this on your own, please do your own due diligence, and may the energy-investing force (and the profits it’s set to generate) be with you for many years to come.
Yours for trading profits,
Sean
P.S. Mark your calendar for noon Eastern today, for Uncommon Wisdom’s Global Energy Summit 2013: From the Pump to Your Portfolio. It’s easy to attend — just click on this link shortly before noon, turn up your speakers and enjoy the presentation!