Natural Gas Will Rise Again: UNG and FCG Provide Two Ways to Play

Includes: FCG, HK, KWK, LINEQ, UNG
by: Jack Haddad

The seven-year low in natural gas prices is possibly the opportunity of a lifetime. The decline has been attributed to several occurences:

1. A significant decrease in demand from the industrial sector

2. Increased output from a combination of oversees production

3. An increase in unconventional gas from shale deposits in Texas and Lousiana.

That said, it's no wonder why natural gas has fallen below the price of $4 over the last month.

Nevertheless, the outlook for natural gas is quite promising. According to the Energy Information Administration (EIA), the consumption of natural gas for 2009 is expected to fall to approximately 1.4% and rise about .6% in 2010. Moreover, Henry Hub spot prices, which averaged $4.65 per thousand cubic feet (Mcf) in February, are expected to average $4.67 per Mcf in 2009 and $5.87 in 2010. Over the long term, the EIA expects Henry Hub spot prices (in 2007 dollars) to reach $9.25 per Mcf in 2030. Additionally, other factors which can potentially increase the price upwards include natural disruptions of natural gas such as severe storms (hurricanes), and a surge in demand from industrials as a result of a faster than expected recovery of the US economy.
While renewable energy companies are expected to represent a larger portion of the U.S. energy portfolio over the next two decades, natural gas along with coal and oil, the three natural resources currently most prevalent, are still expected to meet 79% of U.S. energy supply needs, down from 85% in 2007. Clean energy from renewable sources like the wind, sun and ocean waves, while promising, is likely to take several years before it reaches a critical mass.
An alternative for investors to consider is natural gas. Yes, natural gas is a fossil fuel, but it does offer the advantage of having a cleaner reputation than oil. For those who are considering a stake in natural energy, examine closely the following ETFs:
1. The US Natural Gas Fund (NYSEARCA:UNG). For investors who desire to track the performance of natural gas in percentage terms, UNG is appropriate. For example, when the natural gas April 2009 futures contract recorded a 13.74% increase at 5:14 p.m. on March 19, the UNG ETF followed suit, closing up 13.33% for the day.
The ETF is roughly about .40 cents above its 52-week low of 14.10. The ratio of puts to calls coupled with an accelerating volume suggest that the May 15 strike calls might depreciate rapidly. This gesture is great for option writers. To that end, one can buy the underlying shares and write the May 15 Strike calls at approximately .90/contract.
2. The First Trust ISE-Revere Natural Gas ETF (NYSEARCA:FCG) is suited for investors who wish to invest in an ETF tied closely to natural gas stocks. The largest holdings in FCG include Quicksilver Resources (NYSE:KWK), Linn Energy (LINE) and Petrohawk Energy (NYSE:HK).
FCG's May strike price 10 or 11 offers the same intrinsic time value, depending on how conservative an investor wishes to be. For those who want the possibility of pocketing the intrinsic value in hope of having the underlying shares getting called away by options expiration, the May 10 strike is a better alternative. Conversely, if you desire to establish a holding position with a greater chance of holding the underlying shares past options expiration, the May 11 strike is better.

Disclosure: Author does not own any securities pertaining to the above mentioned companies.