Tuesday, December 7, 2010

Does Natural Gas Provide the Best Investment Opportunity Now?

As most investors know, Natural Gas prices have been severely depressed due to the dramatic increase in supply over the last several years. All at a time that demand has stalled due to the Great Recession. Not to mention that Nat Gas is a domestic play as the US doesn't have the capabilities to export LNG. This is the major reason that Stone Fox Capital has heavily invested in copper and met coal stocks instead of the gasey variety. Those other commodities are greatly benefiting from the demand surge from China, India, and the emerging world. Nat Gas has been completely shut out of that opportunity. 

At least until now if Shawn Hackett of Hackett Financial Advisors is correct. Hackett in a Minyanville.com article makes the case for a parabolic move in nat gas due to the tetonic shift of nat gas to a global pricing mechanism. According to him the US will be able to export natural gas in the next 12 months though I had previously thought it wouldn't be until at least 2015 before some of the LNG terminals had export capabilities (something to check before investing). 

Along with that shift to exports making nat gas a global commodity like oil, copper, and met coal is the fact that both China and India became net importers in the last few years.  With this move the market goes from too much domestic supply to not enough global supply. This shift of especially China from a net exporter to a net importer has been the huge reflection point for dramatically higher prices in other commodities. 

Long term Hackett is seeing the big picture that most investors in this sector are missing. Gas prices are typically much higher in Japan and Europe so its surprising that the US hasn't moved to exporting quicker. Especially considering the government seems slow to push nat gas as a fuel of the future. More importantly though he opened my eyes to the shift in China and India imports. That is a major shift that hasn't been discussed much likely because US investors focus on the domestic market only. 

The key to an investment in this sector is deriving when exports will meaningfully begin and hence push up prices. Some of the suggested investments such as Chesapeake Energy (CHK) are actually moving dramatically towards oil production and away from nat gas. CHK is planning on spending some two thirds of its drilling program on oil by 2012. Considering that the most aggressive producer in the sector is making such a dramatic shift suggests that the LNG export opportunity isn't as quick as the article says. 

Regardless CHK is an intriguing investment just for its shift too much more profitable oil production. Heckmann Corp (HEK) is another great idea as the disposal and treatment of water at the fracking wells is very crucial. For now though, we hold no positions in this sector, but this information makes the story a lot more interesting. 


Via Minyanville:

  • “All anyone’s talking about right now is the glut of natural gas in the United States,” Hackett says. “However, no one’s talking about the US becoming a natural gas exporter as China and India are becoming net importers.”
  • Over the last decade, Hackett explains, whenever China and India have “crossed over the Rubicon in becoming a net importer of any particular commodity, it has preceded a major structural change in the supply-demand balance and a dramatic increase in prices moving forward.”



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