Investing in Natural Gas: It's Time 76 comments
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Natural gas has been in the news for the last few months as supply has outstripped demand. Natural gas is now under $3 mcf, which is a multi-year low. Jimmy Carter declared over 30 years ago, “The U.S. is running out of natural gas.” Fast forward and gas is now cheaper than coal for generating electricity. Shale gas has been exploited with new drilling technology.
If you liked natural gas producers when gas was over $10 mcf, what's not to like about $3 mcf natural gas? Many newsletter writers have pushed the natural gas play since last spring. I believe the time has arrived. We are coming up on winter, and natural gas is poised to heat millions of homes. The economy seems to be recovering, and natural gas is the energy that supports manufacturing. One other use in natural gas's favor: transportation.
Last year, T. Boone Pickens pushed natural gas in the “Picken’s Plan” to wean the U.S. off foreign oil. He made some headway before the collapse in the crude oil price. Well, crude oil and gasoline prices are headed back up. Last year, Fuel Systems Solutions, Inc. (FSYS) hit $61 per share when $4 per gallon gasoline prices had a chokehold on Americans.
FSYS sells meters and valves that let your car, pickup or bus run on compressed natural gas. There are no internal modifications necessary. Just add a tank, valves and meter in front of your car’s fuel intake and you can drive for less than $1 per gallon. You also need a compressor at your home to fill the car from the natural gas line that supplies your house. Guess what? No road taxes. A great way to beat the government!
FSYS is at $32 as we write; UNG (the natural gas ETF) is at multiyear lows. Below is a comparison chart of light sweet crude vs. natural gas. The ratio is stretched almost triple the normal relationship. Oil may get cheaper, gas is so cheap producers may begin to withhold production.
If you believe that all markets return to the norm over time, this chart should give you some idea of the extreme conditions that now exist in the cost of energy from these two sources. The historical ratio looks to be about 8 to 1; we are now sitting at 21 to 1. When a market gets this far out of the normal range, the likely result is a snap back to the historical relationship. Many times the momentum will overshoot the target. I would rather be long natural gas, at these prices, than crude oil.
According to the Energy Information Agency (EIA), we imported approximately four tcf of natural gas last year. Ninety percent of this imported gas came from Canada. Most of this natural gas comes from the Western Canada Sedimentary Basin, where production peaked in 2001. Production has decreased 8.1% since then. Natural gas well production declines much quicker than crude oil. It takes constant exploration and discoveries to replace the depletion. According to Baker Hughes (BHI), a drilling company, there are 688 rigs drilling for natural gas in the U.S. That is 56% less than a year ago. This is the future we face: natural gas is abundant, but we are not replacing the reserves to meet our future needs.
Two other points need to be made concerning natural gas. Reports are that natural gas short interest is running 2 to 1 against long positions. There is no fuel for a rally like short covering! On Friday, rumors circulated that a major hedge fund had taken a huge long position in natural gas.
Our recommendation is to get long FSYS and/or UNG, I like the odds on both of these. One is an investment the other is a trade. Either could make you 50% or more in the next six months.
According to the Peterson Foundation, government debt stood at $184,000 per person in 2008. That adds up to $920,000 for my family of five. I sure am glad our oldest daughter graduated from college last year and is on her own. With the spending this year, we are over a million already. Hold onto your wallet, taxes have to go up.
Who will pay it? 43% of all taxpayers owe no taxes, so it is left to the rest of us. This means you have to pick up their share too. So add another $79,120 to each citizen that PAYS taxes for those that do not pay anything. We add another few billion to the national debt EVERY DAY. With Oh! Bama’s promises not to raise taxes on anyone but the “wealthy”, the only way out of this financial pickle is inflation. Inflation like we have never seen before.
It is laughable to hear Fed Chairman Ben Bernanke talk about maintaining the value of the dollar. The only value the dollar has is the weakness of other currencies. It is like a game of one-upmanship. The U.S. makes stupid decisions, Britain does us one better. Countries are racing to devalue their currency for short-term competitive advantage in trade, and to cover up past mistakes in interest rates and lending.
"There are 100,000,000,000 stars in the galaxy. That used to be a huge number. But it is only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers"---Richard Feynman (1918-1988)
Richard, rest in peace. Oh! Bama and Congress call them rounding errors.
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This article has 76 comments:
On Aug 23 09:00 AM clanson wrote:
> Your blog would have more readers & credibility if you would
> withhold your political bias and your apparent distain for the President.
> I don't disagree with your observations on natural gas but I think
> you're shooting yourself in the foot with 1/2 your potential readers.
Anytime anyone says something about Mr or Mrs Telepromterman the libs/dems and leftist get that "Oh How Dare They Say That " and come to their rescue. Get over it you will hear more and more .
Now back to profiting from ones business decisions we all need to learn to do that no matter who is in the White House.
While GM farts around with batteries , T Boone Pickens is really on to something to with natural gas . Why because the left is against it . OOPs political opinion
long ENER but natural gas sure looks like a much better long term play.
Cheers, DuffBeer
On Aug 23 09:28 AM Bevo wrote:
> Biden in 20011
If depletion is as rapid as some expect, the need to drill new wells will be pressing and prices will skyrocket. The first sign will be injection rates - if gas being injected into storage falls below last years rate on a weekly basis that would be a sign that the rapid depletion scenario is correct.
On Aug 23 09:00 AM clanson wrote:
> Your blog would have more readers & credibility if you would
> withhold your political bias and your apparent distain for the President.
> I don't disagree with your observations on natural gas but I think
> you're shooting yourself in the foot with 1/2 your potential readers.
On Aug 23 10:36 AM dano123 wrote:
> I have no problem with Biden in 20011. That works just fine for me!
>
We can all wait. Before gas goes to 6 bucks its got to hit 4 bucks first. We can wait.
But Carter also claimed we were running out of all natural resources --- and quickly!
What a cynic.
That was thirty years ago. He's as cynical about everything today as he was then. It's in the genes of the left to pick negatives out as if they were nuggets of gold.
Leftist cynic have no credibility; pay them no attention.
As far as investing in NG right now, I do think it's time.
Thank you for the article, Mr. Dalt.
If that's the case, it may simply be another operating cost as opposed to supply side restrictions.
Good article and comment stream...will continue due diligence.
On Aug 23 12:57 PM Tom Armistead wrote:
> Active Rig Counts plummetted and will not go back up until natural
> gas prices are higher. Meanwhile, the big question is the rapid
> depletion of recently drilled horizontal wells in shale formations.
> I have seen estimates that more than 50% of the total yield is taken
> out in the first year of production.
>
> If depletion is as rapid as some expect, the need to drill new wells
> will be pressing and prices will skyrocket. The first sign will
> be injection rates - if gas being injected into storage falls below
> last years rate on a weekly basis that would be a sign that the rapid
> depletion scenario is correct.
On Aug 23 12:57 PM Tom Armistead wrote:
US has reserves for 100 years min.
This is a future gold .
Buy NG next early year this will be bottom.
I've heard we have 1 1/2 times the energy equivalent in NG reserves as Saudi Arabia has in oil. This indicates to me that eventually, the NG train will get rolling. And there will probably be no better time than the very near future to go on board.
We'll need to see some serious legislative action for transporation to make a contribution near-term. Regardless, private and civic entities are proceding on transportation regardless of the clowns in D.C.
But that means long-term steady increases - not good for a near-term "pop".
HardToLove
I think nat gas will continue to spin its wheels right through the eventual next downturn.
However, I find this article as worthless as any other in HOW to do it.
1) UNG is a disaster;
2) Suppliers (CHK et. al.) are not adequately de-coupled from excessive market exuberance (i.e. overpriced given their earnings).
Unless you're willing to trade futures contracts and play swings, it's a difficult horse to ride.
Anyone have suggestions on real values in producer firms?
HardToLove
On Aug 24 10:18 AM Mayascribe wrote:
> Funny, though, Arch Coal and Patriot coal are stock stars, today.
HardToLove
On Aug 24 10:18 AM mbkelly75 wrote:
> Nat Gas is a good buy right now - no matter where it goes from here
> - the historical price ratio between Oil/Nat Gas is 8/1 and it is
> 23/1 right now !!!! It will eventually return to the median so either
> Nat Gas has to go up or Oil has to come down or both. Who among you
> believes that Oil is going down over the long-term ????? I, sure
> as heck, do not believe that one !!!! I read recently that some experts
> were saying a month or so ago that Oil would reach 60 by the end
> of this year. That was a bit conservative since this morning Oil
> touched 75. I have invested in Energy stocks that pay a dividend
> and have not been sorry. Some of them are US stocks and I also have
> CANROYs and investments in Brazil. I have done well in all of them
> and will continue to re-invest the dividends in the stock that paid
> them and let it ride. I will be ahead that way - no matter what the
> market does, but I do think the price of both Oil and Nat Gas is
> going up from here.
On Aug 24 10:45 AM Whippet wrote:
> I agree with the premise of buying value in NG, and playing the gas/crude
> ratio.
>
> However, I find this article as worthless as any other in HOW to
> do it.
> 1) UNG is a disaster;
> 2) Suppliers (CHK et. al.) are not adequately de-coupled from excessive
> market exuberance (i.e. overpriced given their earnings).
>
> Unless you're willing to trade futures contracts and play swings,
> it's a difficult horse to ride.
>
> Anyone have suggestions on real values in producer firms?
On Aug 23 01:46 PM Steven Ward wrote:
> NG goes up when articles such as this one dissapear and the newsletter
> guys throw in the towel.
>
> We can all wait. Before gas goes to 6 bucks its got to hit 4 bucks
> first. We can wait.
On Aug 23 09:00 AM clanson wrote:
> Your blog would have more readers & credibility if you would
> withhold your political bias and your apparent distain for the President.
> I don't disagree with your observations on natural gas but I think
> you're shooting yourself in the foot with 1/2 your potential readers.
On Aug 23 09:00 AM clanson wrote:
> Your blog would have more readers & credibility if you would
> withhold your political bias and your apparent distain for the President.
> I don't disagree with your observations on natural gas but I think
> you're shooting yourself in the foot with 1/2 your potential readers.
Tcfe 7,000,000,000,000
mmBTU 7,000,000,000
BOE 1,206,896,552
Shares outsanding 151,440,000
BOE/share 8
Market $/Boe 75
Value per share 598
Current $/shr $47.00
CST $/BOE $5.90
Call me crazy, but I am backing up the truck!
On Aug 24 11:51 AM Wilson Siu wrote:
> What the writer is also implying is that Obama's policy is inflationary,
> thus Natural Gas would also naturally go up in price.
>
Do you have any support for this? In 2003 the NYT showed that when you take into account ALL forms of taxation (not just personal income tax as lots of people do), the tax code is already pretty flat.
graphics7.nytimes.com/...
??
HardToLove
On Aug 24 01:59 PM fjd10595 wrote:
> Good, except the part about the economy "getting better". Think again.
> I still think that Nat Gas is undervalued right here.
HardToLove
On Aug 24 03:44 PM H. T. Love wrote:
> I haven't investigated, but I *thought*, based on what I've read,
> that coal was the primary fueld for generation because of cost.<br/>
>
> ??
>
> HardToLove
Fortunately, most of the materials used by the NG producers are also locally obtained, so they shouldn't see much input cost spike as inflation (finally - a couple years out most likely) rears its ugly head.
HardToLove
On Aug 24 11:51 AM Wilson Siu wrote:
> What the writer is also implying is that Obama's policy is inflationary,
> thus Natural Gas would also naturally go up in price.
>
On Aug 24 03:19 PM naturallight wrote:
> >>>43% of all taxpayers owe no taxes, so it is left to the rest of
> us.
>
> Do you have any support for this? In 2003 the NYT showed that when
> you take into account ALL forms of taxation (not just personal income
> tax as lots of people do), the tax code is already pretty flat.<br/>
>
> graphics7.nytimes.com/...
Scooter Pop
On Aug 23 08:33 PM SJMDESIGN LTD wrote:
> NG will hit $2.0 bottom before it will the trend is reversed.
> US has reserves for 100 years min.
> This is a future gold .
> Buy NG next early year this will be bottom.
On Aug 24 05:36 PM Smrt1 wrote:
> The reason why it is important to specifically discuss income tax
> rates is that it is the only tax specifically targeted at your production
> value to society and because most other taxes are all deducted versus
> income taxes therefore being zeroed out if you are looking at it
> from a mathematical standpoint. The lower 40% take advantage of numerous
> tax relief and renumeration programs most notably the Earned Income
> Tax Credit. Only very few taxes are not deductible such as alcohol,
> gasoline and utility taxes and utility companies nowadays actually
> offer reduced rates for low income taxpayers. The net of all of this
> is those in the lower half of the income brackets ie earning approx
> $32k annually have as a percentage of income, a tax rate of less
> than 1%. (Disclosure: I have a degree in Economics and certifications
> in Accouning and have worked in the Tax field.)
I agree natural gas trades at a good risk/reward at the moment. One might even say that it's cheap. However, I wouldn't call FSYS cheap. At almost 14% premium, I wouldn't call UNG cheap either.
If situation around UNG gets resolved, it may very well drop 14% in one day. You may argue that it's insignificant because you already set your sights on making 50% in six months, but I think it would be a mistake to pay for a remote possibility of 50% in six months with almost certainty of losing 14% in the next few weeks.
Why not open a futures account and setup a position in nat gas futures instead of gambling with UNG?
Is "convenience" really worth 14%?
Or are you a believer in the efficient market hypothesis according to which paying 14% premium must be a good deal?
If so, please consider the efficient life hypothesis :)
Well he was wrong then, and you are wrong now, that's what I'm declaring BTW.
UNG is a good pick, but I would like to find out more about FSYS. How much does it cost to convert a small car to run on CNG ?
Is the current administration subsidizing CNG station? I found that the closest CNG station is 10 miles away from my home. That will surely discourage me from converting my car at this moment in time.
On Aug 23 09:28 AM Bevo wrote:
> Biden in 20011
On Aug 24 11:52 AM dano123 wrote:
> I am no expert, but if you include Ultra Petroleum's Marcellus reserves
> which presently are not accounted for,then I come up with the following
> approximate math:
>
> Tcfe 7,000,000,000,000
> mmBTU 7,000,000,000
> BOE 1,206,896,552
> Shares outsanding 151,440,000
> BOE/share 8
> Market $/Boe 75
> Value per share 598
> Current $/shr $47.00
> CST $/BOE $5.90
>
> Call me crazy, but I am backing up the truck!
On Aug 23 09:28 AM Bevo wrote:
> Biden in 20011
Don't get too addicted to the idea of avoiding road fuel taxes, as soon as a grid pops up the tax man cometh. As a matter of fact the tax man is already thinking of lost tax revenue with NG and electric cars. There is a move to require satellite monitoring of vehicles so that you get a tax bill on the miles you drive. You may be able to stick it to the man for a little while, but he didn't get where he is by getting it stuck to him. I hope that isn't too political for any of you.
On Aug 24 11:37 PM Nelson_Lai1975 wrote:
> I agree with your analogy of what what goes down must eventually
> comes back up.
>
> UNG is a good pick, but I would like to find out more about FSYS.
> How much does it cost to convert a small car to run on CNG ?
>
> Is the current administration subsidizing CNG station? I found that
> the closest CNG station is 10 miles away from my home. That will
> surely discourage me from converting my car at this moment in time.
typical obama pee wee
On Aug 23 09:00 AM clanson wrote:
> Your blog would have more readers & credibility if you would
> withhold your political bias and your apparent distain for the President.
> I don't disagree with your observations on natural gas but I think
> you're shooting yourself in the foot with 1/2 your potential readers.
That stupidity undermines anything you have to say about markets.
On Aug 24 01:25 PM Bluechippie wrote:
> Cheaper natural gas is probably a good thing as it will convince
> more power generators to switch to natural gas rather use the expensive
> petroleum that we import from countries that do not like us very
> much.
On Aug 24 05:36 PM Smrt1 wrote:
> The reason why it is important to specifically discuss income tax
> rates is that it is the only tax specifically targeted at your production
> value to society and because most other taxes are all deducted versus
> income taxes therefore being zeroed out if you are looking at it
> from a mathematical standpoint. The lower 40% take advantage of numerous
> tax relief and renumeration programs most notably the Earned Income
> Tax Credit. Only very few taxes are not deductible such as alcohol,
> gasoline and utility taxes and utility companies nowadays actually
> offer reduced rates for low income taxpayers. The net of all of this
> is those in the lower half of the income brackets ie earning approx
> $32k annually have as a percentage of income, a tax rate of less
> than 1%. (Disclosure: I have a degree in Economics and certifications
> in Accouning and have worked in the Tax field.)
On Aug 24 03:19 PM naturallight wrote:
> >>>43% of all taxpayers owe no taxes, so it is left to the rest of
> us.
>
> Do you have any support for this? In 2003 the NYT showed that when
> you take into account ALL forms of taxation (not just personal income
> tax as lots of people do), the tax code is already pretty flat.<br/>
>
> graphics7.nytimes.com/...
But like 2 miners looking for gold, wouldn't you rather be the one who is the most efficient (Ultra is the industry low cost producer) and sitting on a stake that is twice as big as everyone thinks?
On Aug 25 01:15 AM Vikram12 wrote:
> There is something called present value of money. You missed out
> the most important part Oil exploration firms incur cost to operate
> they hold reserves which need to be extracted. And more over the
> profits have to be discounted to the present. Your valuation of the
> firm is incorrect they cannot be valued like a futures contract.
>
The prompt NGV9 is cheap or actually fairly priced because of the above, but the NGZ9 is way too high given the above. The spread is the widest its has ever been. Plus NGZ9 will expire around 11/27/09 and it will be too cold to say if we will have an early winter. If there is a moderate to normal winter prices will collapse in the front and weaken in NG(J-V)10. So where is there good value? No where at the given moment. You have to let the hurrican season play itself out to see if prices move upwards. And you have to see if there is an early winter before you take the WAG being long NG.
Those intrigued by the wide CL:NG spread have been wrong for well over a year. The two commodities are following different fundamentals. Crude is used as a proxy for the weak dollar, strong equity markets and inflation also with a weak supply/demand story. NG is about the huge inventory overhang and strong new source of domestic NG and the possibility of new import sources. There is no physical nor financial shortage. Go ahead and throw your money away listening to this guy.
"... government debt stood at $184,000 per person in 2008..... 43% of all taxpayers owe no taxes, so it is left to the rest of us. This means you have to pick up their share too. So add another $79,120 to each citizen that PAYS taxes for those that do not pay anything."
If the author can't do basic math, why would anyone trust of the rest of his reasoning ?
Guessing the negative outlook on NG is due to the shorts trying to validate their position and make some money, which makes sense to me and I would probably try to do the same. However, the drop in NG prices shall pass (due to many of the comments above and a few others not mentioned) and I sure would hate to be short when that happens. It will be impossible to time and when the big boys move out, the small investor will be too late. I am all for making money so shorts take your profits (I would be right there with you but too cautious to gamble with an unlimited loss potential), but being short into November will not be a smart move.
Obama is spending us into Banana Republic Status!
a) At < $3.00 NG, are any NG companies making money, and if so, who?
b) What is the current lowest cost today to start drilling and producing NG from the largest shale plays?
c) If you've already drilled and Frac'd some shale, what's the incremental costs to extract this gas and get it to market?
In my opinion, economic extraction of NG from shale is a relatively new paradigmshift, so until the world energy producers and consumers get a better handle on what this new supply means, the traditional NG to Oil price ratios may stay at non-traditional levels for quite a long period of time.
Regards,
Curtis.
I was about to slit my portfolio and and dump myN gas. You saved my fortune, then you gave it away. Is that right?
On Aug 26 04:41 PM CapNgain wrote:
> Before I'm willing to predict which way NG prices will go, I want
> to understand the underlying fundamentals. Can anyone answer the
> following questions:
>
> a) At < $3.00 NG, are any NG companies making money, and if so, who?
>
> b) What is the current lowest cost today to start drilling and producing
> NG from the largest shale plays?
> c) If you've already drilled and Frac'd some shale, what's the incremental
> costs to extract this gas and get it to market?
>
> In my opinion, economic extraction of NG from shale is a relatively
> new paradigmshift, so until the world energy producers and consumers
> get a better handle on what this new supply means, the traditional
> NG to Oil price ratios may stay at non-traditional levels for quite
> a long period of time.
>
> Regards,
>
> Curtis.
Bush was bad, but Obama is far worse on fiscal matters, he has racked up more debt in the first few weeks in office than Bush did his entire 8 years combined, and that's with two expensive wars! And Obama keeps doubling down with all sorts of policies that will absolutely destroy the dollar.
A stable currency in necessary for any long term economic prosperity and recovery.
Read this for more:
freakonomics.blogs.nyt.../
The deficits "big spender" Bush ran are miniscule compared to Obama, and we're only in Obama's first year.
Here's a chart comparing the two:
blog.heritage.org/wp-c...
On Aug 27 08:22 PM naturallight wrote:
> ^^^ Are you kidding? Bush took a huge surplus and left with a huge
> deficit.
>
> Read this for more:
> freakonomics.blogs.nyt.../
If you need any medications, you have watched those double in 18 months. Food is going up. Canned tuna is 20% smaller with no reduction in price. Ground beef, $5 and quality is horrible these days. Inflation has you surrounded for the things you need. Not so much for toys though.
easy enough
Maybe we need to add another few thousand for my worthless brother in law, and Oh! Bama's aunt (illegal, but won't leave).
On Aug 25 10:07 PM Mathguy wrote:
> I guess math is not the author's strong point in view of this howler:
>
>
> "... government debt stood at $184,000 per person in 2008..... 43%
> of all taxpayers owe no taxes, so it is left to the rest of us. This
> means you have to pick up their share too. So add another $79,120
> to each citizen that PAYS taxes for those that do not pay anything."
>
>
> If the author can't do basic math, why would anyone trust of the
> rest of his reasoning ?
Ok, so we are sold, we all want to buy NG...HOW??? UNG is like buying TBT for a 2 year period...i,e, DUMB
All the producers are run up...so what is the play?? Whippet, you rock!
On Aug 24 10:45 AM Whippet wrote:
> I agree with the premise of buying value in NG, and playing the gas/crude
> ratio.
>
> However, I find this article as worthless as any other in HOW to
> do it.
> 1) UNG is a disaster;
> 2) Suppliers (CHK et. al.) are not adequately de-coupled from excessive
> market exuberance (i.e. overpriced given their earnings).
>
> Unless you're willing to trade futures contracts and play swings,
> it's a difficult horse to ride.
>
> Anyone have suggestions on real values in producer firms?