Energy Investing: Natural Gas Looks Especially Interesting

Oil is still above $61 a barrel, and as I write this (July 16, 2009), Natural Gas has rallied over 10% in one day to $3.62 per mmBTU. I'm more than a bit suspicious about energy prices because I believe there is still a glut of supply and that "real life demand" (RLD) is dropping with each passing month.

That having been said, I'm very excited about the longer-term prospect for Natural Gas. Recently I watched an important interview on Bloomberg TV with Jason Gammel, an energy analyst with Maquarie Securities USA, which confirms other sources I have concerning both the shorter-term and longer-term probabilities with Natural Gas.

Also on the energy front, on July 10th I noticed that U.S. natural gas (NG) inventories rose 75 billion cubic feet in the week ended July 3rd to reach 2,796 billion cubic feet, according to the Energy Information Administration. Analysts at IHS Global Insight had expected an increase of 71 billion cubic feet.

At the current level, inventories were 601 billion cubic feet higher than last year at this time and 452 billion cubic feet above the five-year average.These are huge year-over-year differences, and with cooler weather in the Northeast US this summer the demand is down.

Gammel told Bloomberg that there are "huge inventories of NG and Liquid Natural Gas (LNG)". With the weak demand for NG he already sees drilling declining and he said that the "rig count" is way down from last year at this time. His theory is that by the 2nd quarter of next year that will begin to reverse the supply situation and that shortages of NG will ensue.

In the next 4 to 6 months, Gammel thought there was a high probability that NG prices could fall into the "$2s", which would cause more drilling rigs to shut down and perhaps cause a marked slow-down in production. He said that even if there was a major hurricane in the Gulf of Mexico this year he still felt that we will continue to see a huge glut in NG supplies.

This will be helpful to the economies of the world during this time of worldwide recessions, but it will also set the stage for a "big reversal in the price of NG" in 2010 and 2011. In fact, Gammel predicts that the price of NG will soar up to "the $8s" next year from the lows that we will experience later this summer and fall.

If that does happen, it isn't hard to see that NG is one of the most compelling investment themes over the next year or two, even more exciting than silver, which I believe is likely to double from whatever low is established between now and November of 2009.

Gammel of Macquarie Securities USA said he likes Chevron Corp. (NYSE:CVX) at around $60 per share, which at that price would have a dividend yield of 4.33%. It claims the share price of CVX has a 12-month potential of going up to around $84 a share.

His favorite way to play the NG investment story is Southwestern Energy Company (NYSE:SWN) which engages in the exploration, development, and production of natural gas and crude oil in the United States. The company operates in two segments, Exploration and Production, and Midstream Services.

He mentioned that SWN is big in LNG and that overall he expected SWN to increase their production by a whopping 50% this year along and another 30% next year.

Steve Gelsi at MarketWatch (MarketWatch.com) reported Thursday that "A leading investment banker looks toward more multi-billion dollar energy deals in the U.S. as bigger players take aim at hefty unconventional domestic natural gas reserves, even while energy prices remain low.

"Scott Van Bergh, head of Americas Energy Corporate & Investment Banking for Bank of America Merrill Lynch, touted his firm's role in Chesapeake Energy's (NYSE:CHK) $3.4 billion sale of Marcellus shale drilling rights to Statoil Hydro (NYSE:STO) late last year, and said similar deals may continue in 2009 and 2010.

"Overseas players from Europe or Asia may find similar asset purchases or outright mergers attractive as a way to tap into the unconventional natural gas business, Van Bergh said in a telephone interview.

"At some point, the low natural gas prices will attract some corporate mergers and acquisitions in the gas production business," he said. "We haven't seen that yet but we ultimately will."

"Van Bergh said he sees companies without significant exposure to unconventional shale plays attracted to the U.S. - still the world's largest energy markets without the political risks of doing business in less stable countries.

"Everybody believes that the natural gas industry will recover although we're in a supply glut today," Van Bergh said. "With drops in rig counts, demand will soon catch up to supply and these assets will be highly profitable. Large independent or major oil companies will need to move into the asset and the only way to get it is through a corporate merger or asset acquisition."

"He pointed out at least two other significant asset sales in unconventional gas after the Chesapeake deal: Exco Resources' (NYSE:XCO) $1.3 billion shale gas development deal with BG Group on June 30; also Quickilver Resources Inc.'s (NYSE:KWK) $280 million deal with ENI (NYSE:ENI) on May 18 for natural gas lease interests".

I personally like SWN and CHK the best in the natural gas space, as well as Devon Energy (NYSE:DVN). I have a GTC order in to buy SWN if it drops below $33. If NG did go up to the $8s in the next year or so, SWN, CHK, and DVN shares would benefit greatly, with SWN and CHK being more directly and positively impacted.

When it comes to the United States Natural Gas ETF (NYSE:UNG), I'm waiting to see if the share price might dip below $11 before I begin accumulating. In the long-run I'm hoping for a triple with UNG if we can buy the shares low enough. When the "blood is running in the streets" on NG and all the talking-heads are bad-mouthing it, that will be the time to buy.

Disclosure: As of the day I wrote this article, I don't own any of the stocks or the ETF mentioned.

Comments

[Mmarrkk:]

Marc:

You quoted that guy saying that SWN has a huge piece of LNG. Have you checked that out? I'm thinking that guy is completely wrong! I looked over their web page and found nothing even closely resembling a linkage to LNG other than the fact that SWN produces natural gas.

Since the guy is so completely off base and factually incorrect on such an elementary point, can he really be trusted as a financial analyst?? When all it takes is the worldwide web and a quick visit to a company's web page to do very elementary research (or maybe pre-school research), and this guy gets it wrong, then I'm guessing his credentials as an analyst are pretty shaky at best.

If I were you, I'd research the guys I quote in my article. This guy is out to lunch!

Jul 17 09:13 AM

[Mmarrkk:]

Oh, my above comments aren't meant to be a slam on the recommendation of SWN...they are a great company and a screaming buy for the LONG TERM, but the premise given in the article is fundamentally flawed! Or at least tainted with ignorance on his part.

Jul 17 09:14 AM

[basehitz:]

I concur we'll have another swoon, and that I expect to be the buy opportunity. Given the negative roll yield, I'm not going in early to take a hit each month. The storage situation could create this final washout.

From the EIA website, Peak working gas storage capacity as of mid-2008 is 3,789 Bcf.
www.eia.doe.gov/pub/oi...

As of 7/10, storage was 2,886 Bcf.

NG commonly is injected into storage during April through October per EIA. There are 16 weeks from 7/10 thru end Oct. Assume 80 BCF injection/week throughout this period. Recently it has been running higher. Last year the slope was fairly linear. That would result in 1,280 Bcf additional injection before extraction season.

Adding 1,280 Bcf to existing 2,886 Bcf would result in total storage of 4,166 Bcf, which is more than EIA estimates can be stored. Even if you assume 4 weeks shorter injection period (i.e., ends Oct 2, which it won’t), there would be 960 Bcf added for total storage of 3,846 Bcf, which is probably manageable but assumes an unrealistic end date to injection.

And in spite of dramatic drill rig count reduction, the storage slope remains fairly typical.
www.eia.doe.gov/oil_ga...

Houston, we have a problem.

Jul 17 09:20 AM

[mowgli:]

Natural Gas futures are in a contango..December 2010 delivery are already at $6.8..it would be incorrect to say that we could benefit from this expected jump from $3s to $8s, when it is already priced into the far futures.

Jul 17 10:54 AM

[Buck East:]

Rig counts going down-->production going up. Look at RRC Q2. The world is awash in gas. Who is going to use it all?

Jul 17 11:23 AM

[lostcreek:]

This type of "research" scares the hell out of me. I've been long Southwestern for years. Great company. Fayetteville Shale, a move into the Marcellus, the Ranger Anticline, the Angelina River trend, maybe some Haynesville Shale, and legacy Arkoma production. Excellent balance sheet, excellent cost structure.

But LNG? Ridiculous!

Too many people have been mentioning Southwestern in the media. Scares me!


On Jul 17 09:13 AM Mmarrkk wrote:

> Marc:
>
> You quoted that guy saying that SWN has a huge piece of LNG. Have
> you checked that out? I'm thinking that guy is completely wrong!
> I looked over their web page and found nothing even closely resembling
> a linkage to LNG other than the fact that SWN produces natural gas.
>
>
> Since the guy is so completely off base and factually incorrect on
> such an elementary point, can he really be trusted as a financial
> analyst?? When all it takes is the worldwide web and a quick visit
> to a company's web page to do very elementary research (or maybe
> pre-school research), and this guy gets it wrong, then I'm guessing
> his credentials as an analyst are pretty shaky at best.
>
> If I were you, I'd research the guys I quote in my article. This
> guy is out to lunch!

Jul 17 11:49 AM

[Laughing:]

the move in stocks will happen before the rise in NG, trust me here. I think we are a the bottom, I don't see a pull back coming in the October shoulder season, due to the decreased rig count. Gas prices should move up to 4-5 during the remaining summer months, and through the fall we should see low 4s, but once the winter hits hold on to your positions as the ride up will be fast and swift. You will want to already own the stocks ahead of the move. As far as owning UNG, that can be done in November 2009, not sooner. CHK and SWN, buy sooner than later or you will miss the beginning of the run up, you will miss a easy 30% gain. I expect CHK to trade near $50 by January of 2011, if NG is at 8 dollars before then, logic tells you it should actually trade higher!

Jul 17 01:10 PM

[Mmarrkk:]

Laughing: I'd love for your scenario to come true but looking at production, demand and storage figures, we are still seeing way too much gas. The folks in the Haynesville and the Marcellus aren't cutting back on their drilling and the production glut is still where it was back in January. I see prices at $6 or so going into the winter of 2010!

Jul 17 01:19 PM

[Marc Courtenay:]

I appreciate your comments. That's why I encourage us to do our own due diligence on the companies we are interested in and the analysts we follow. Perhaps when it comes to LNG he was referring to the future demand potential that LNG might have on SWN's production. Another company I'm checking out on the Natural Gas side that sounds very promising to me is Contango Oil & Gas. I might even write an article to whet our appetites. Your points are well taken and I too believe that an interview (and Gammel gave an excellent, intelligent interview with Bloomberg) is NOT enough to make him your expert or mine.


On Jul 17 09:13 AM Mmarrkk wrote:

> Marc:
>
> You quoted that guy saying that SWN has a huge piece of LNG. Have
> you checked that out? I'm thinking that guy is completely wrong!
> I looked over their web page and found nothing even closely resembling
> a linkage to LNG other than the fact that SWN produces natural gas.
>
>
> Since the guy is so completely off base and factually incorrect on
> such an elementary point, can he really be trusted as a financial
> analyst?? When all it takes is the worldwide web and a quick visit
> to a company's web page to do very elementary research (or maybe
> pre-school research), and this guy gets it wrong, then I'm guessing
> his credentials as an analyst are pretty shaky at best.
>
> If I were you, I'd research the guys I quote in my article. This
> guy is out to lunch!

Jul 17 05:38 PM

[Marc Courtenay:]

I'll say...thanks for this info Basehitz. You've done it again and we benefit.


On Jul 17 09:20 AM basehitz wrote:

> I concur we'll have another swoon, and that I expect to be the buy
> opportunity. Given the negative roll yield, I'm not going in early
> to take a hit each month. The storage situation could create this
> final washout.
>
> From the EIA website, Peak working gas storage capacity as of mid-2008
> is 3,789 Bcf.
> www.eia.doe.gov/pub/oi...
>
>
> As of 7/10, storage was 2,886 Bcf.
>
> NG commonly is injected into storage during April through October
> per EIA. There are 16 weeks from 7/10 thru end Oct. Assume 80 BCF
> injection/week throughout this period. Recently it has been running
> higher. Last year the slope was fairly linear. That would result
> in 1,280 Bcf additional injection before extraction season.
>
> Adding 1,280 Bcf to existing 2,886 Bcf would result in total storage
> of 4,166 Bcf, which is more than EIA estimates can be stored. Even
> if you assume 4 weeks shorter injection period (i.e., ends Oct 2,
> which it won’t), there would be 960 Bcf added for total storage of
> 3,846 Bcf, which is probably manageable but assumes an unrealistic
> end date to injection.
>
> And in spite of dramatic drill rig count reduction, the storage slope
> remains fairly typical.
> www.eia.doe.gov/oil_ga...
>
> Houston, we have a problem.

Jul 17 05:41 PM

[Marc Courtenay:]

I'm grateful for your diligence and clarification Freya, and it underscores the potential opportunity that lies ahead of us. It will be interesting to see how Jason's predictions pan out. Yes, another very cold winter could speed up the process I would think. Regards and thanks again for your help and interest.


On Jul 17 02:07 PM Freya wrote:

> Yes. I was right. The 40 min Bloomberg video has Jason roughly in
> the Middle talking about NG production. He expects a production decline
> by The End of This year in the range of 25-30% and a move up in NG
> prices by the 2nd Qtr of next year because the Inventory overhang
> will mitigate the rise.
>
> Personally, I believe a Cold winter like last year's will drain it
> faster.

Jul 17 05:45 PM

[Crude Oil T...:]

I have been calling for UNG to be a buy at $9.50 and the pitch forks come out. Natural gas will see $2.90, good call Marc.


crudeoiltrader.blogspo...

Jul 17 10:55 PM

[BPYHO:]

Silver? Are you serious!? I disagree, it will pop a little bit the next couple weeks and when ZSL gets down to 7.50 I will be buying like mad. Silver is going DOWN.

Jul 18 12:14 PM

[bartpr:]

storage goes into porous rock in many cases. the more injected the higher pressures needed to move the gas further into the porous formation. next, what is the max capacity of the compressors that will do the injections. are they maxed out at the operating pressures designed for or not. who knows any of this. not i for sure.

what is the max storage capacity of the existing fields at this point. i know this. at some point capacity will be reached and production will be curtailed. the further gs goes into the porous rock the harder it is to retrieve it.

this anaysis lacks in any depth of fact. give me more facts.

Jul 19 09:54 AM

[Value Inter...:]

I would caution most investors on trying to play natural gas with UNG. The negative roll return when the markets are in contango kills the performance of this thing. In order to successfully play UNG, you have to correctly predict the future direction of natural gas prices AND the future makeup of the futures market (ie contango or backwardation).
A couple years ago, I bought UNG when gas was around $5.50. Within about 3 months or so, NG went up to $8, a 45% jump. Yet UNG only gained 22%. Very lousy tracking indeed. The actual stocks of natural gas companies track the price of gas MUCH better than UNG does. I would recommend an investors who is bullish on gas to buy FCG which tracks most of the major US gas producers.

Jul 19 10:44 AM

[natural gas...:]

Appreciate the comments and the posting. I too think natural gas is looking very interesting these days.

C. Keddy
naturalgasforamerica.com

Jul 23 07:11 PM