First, if you are looking for deep discount value, take a look at the two-year chart below, compliments of Yahoo! Finance, of the US Natural Gas ETF (NYSE:UNG) and see if you notice what I notice.
click to enlarge
The 200-day moving (the red line) average is slightly below $39 and the ETF shares are selling at just above $18, the lowest price this ETF has ever traded at. Natural gas spot price per unit is trading now around $4.38. This is a 7-year low.
WHAT DOES THE SPOT PRICE MEAN?
The spot price of Natural Gas is the current price at which Natural Gas can be bought or sold. It is the wholesale price that is quoted if you wanted to buy Natural Gas today. The price is quoted per Million BTUs of energy.
The more dramatic chart is this year's spot price of natural gas which has fallen by two-thirds. Last July, the spot price for gas was a shocking $13 and now it is down to just over $4.30
Besides UNG, other ways to play the idea of an impending rally in natural gas would be to buy the largest independent natural gas producer in the United States, Chesapeake Energy (NYSE: CHK). CEO Aubrey McClendon was recently interviewed on CNBC. Due to many factors, including the fact that he had purchased CHK shares on margin, he had the mother of all margin calls when the stock plummeted from $74 a share. We are told he sold $31 million shares at around $18 per share and by the rules he can't buy back until April of this year.
McClendon believes that natural gas will be the "go-to" fuel for the Obama administration in their effort to reduce America's dependence on foreign oil and to reduce carbon emissions during the process of creating power and fueling vehicles.
As of December 31, 2007, CHK had 10.879 trillion cubic feet equivalent of proved reserves; and also owned interests in approximately 38,500 producing oil and natural gas wells.They recently had no trouble raising new money to pay off some expiring credit facilities.
The book value per share of CHK is over $27.35 and its balance sheet shows cash of almost $2 billion. One concern is the high debt ratio (.874) and total debt (most-recent-quarter) of $14.35 billion. Their operating cash flow of $5.85 billion should be more than adequate to service that debt factor. McClendon said that natural gas producers like CHK do "very well during times when prices are this low" and they have hedged the majority of their production at around $7 per MMBTU through most of this year. That's encouraging when natural gas currently is at $4.38 per MMBTU.
If you want a rich dividend and a mix of natural gas and oil production, consider BP (NYSE: BP), the former British Petroleum, which reports earnings on Feb.3rd and also owns a 25% state in CHK. With a 7.7% current dividend yield (at $42.79 a share currently) this is an attractive possibility. Its current P/E ratio is just below 5 and the future P/E is a little over 8.
If you are interested in BP, it would be discreet to wait to see how the earnings report goes and how it impacts the stock. It wouldn't surprise this writer to see the stock price test the 52-week low of $37.57.
Any way you slice this pie, you know it's a resource that the world can't live without. Production of natural gas goes way down when the price is this low and that usually sets the stage for future supply shortages. The weather, natural disasters and geopolitical crises can cause some unexpected spikes too.
All we know for sure is that natural gas is more abundant than oil, burns cleaner than oil, and is more plentiful in the US than oil. Sure, natural gas could fall further, but you and I both know that history has taught us that the upside potential from here trumps whatever remaining downside risk that we may experience.
Few investment themes in this day and age have such compelling fundamentals. And there are few natural resources more essential to the energy, transportation, food production and security needs of the world than natural gas.
Take another look at the one-year chart above and ask yourself, "Is natural gas on sale right now?" When is the best time to begin accumulating a "green", natural resource that has had an unprecedented correction? Don't you wish you had loaded up the truck back in November when gold fell to $700 and silver hit $8?
This looks like an opportuntity that comes along just a few times in an investor's life. It might be considered an ideal "long-term investment" with the potential of a "short-term positive surprise".
Disclosure: long ung, chk