The rollover in natural gas prices is something you can see from space.
Most investors who have considered the consequences have focused on Chesapeake (NYSE:CHK), one of the true "battlefield stocks" here at SA. My own view has been unremittingly bearish and most of the moves made by management, including the coming retirement of founder Aubrey McClendon, have made little difference to the stock price, despite the cries of touts like our own Dieter Plas, who remains convinced the stock is a hold for current holders.
But the natural gas glut has not responded, as past gluts, to flaring and efforts to manipulate supplies downward. That is because infrastructure to export it still doesn't exist, and because it comes associated with liquids and oil, which remain high-priced.
Still, the rollover is now starting to hit other players, including Apache (NYSE:APA), the leader. The share price has fallen nearly $6/share since the company announced lower income on decreased margins.
Apache is mainly engaged in work in West Texas and Oklahoma, which have enough pipelines to get gas to market. But as more gas is produced the price of connections have to increase, which is just one element in higher costs. Drilling costs increase with horizontal wells, and fracking is not foolproof.
But the main driver here is price. The price of natural gas is not rising. Spot prices are stuck at a little over $3/mcf and while futures expect higher prices those traders have been wrong in the past on price direction.
The industry is doing all it can to increase demand. Kinder Morgan (NYSE:KMI) and a unit of Royal Dutch Shell (NYSE:RDS.A) are working together to create an export terminal in Savannah, Georgia. That project would absorb up to 350 million cubic feet/day, but that will take time to set up. Cheniere Energy (NYSEMKT:LNG) won permission to build an export plant last year. But this will take time to build out.
The industry is also pushing to convert more vehicles, especially commercial vehicles, to using natural gas. Clean Energy Fuels (NASDAQ:CLNE), a prime backer of the move, has yet to reward shareholders for their patience, however.
Demand will grow, and it may over time overwhelm growing supply. But that is a process that will take years, and investors looking for a return now have better places to play, including natural gas infrastructure players like KMI and its affiliates.
The rule we apply to solar also applies here. When you can't get profits on the commodity, you want to be on the sell side of the trade, the side of the company creating demand. That's downstream in natural gas.
Disclosure: I am long KMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.