Nibbling on Natural Gas, Concerned about Atlas Pipeline Partners

So natural gas is falling and falling hard. It was below $2.81 as I wrote this and no one seems to know where it will fall to. My guess is around $2.50 per BTU. I hope I'm wrong though because I'm beginning to put my money where my convictions are.

I recently bought some Chesapeake Energy (NYSE:CHK), which was up Friday more than 3%, partly because we were told that many of their contracts are hedged at a much higher price than the current price of natural gas.

United States Natural Gas (NYSE:UNG) hit a 52-week low Friday of $11.29, and it wouldn't surprise me to see it fall below $11 before this is all over with. Check out this 6-month chart:
If a picture paints a thousand words, the above chart tells it all. As soon as UNG fell below $11.72 I began to buy and I'm hoping to make my biggest purchases below $11, but who knows if it will fall that low.

The futures market is telling us that a year or two from now natural gas prices will be above $6, so I like the upside potential with an investment like this one.

Now when it comes to Atlas Pipeline Partners (NYSE:APL) I'm beginning to think that Chris Mayer of Capital & Crisis fame is correct when he wrote Friday,

You’d think pipelines would be a simple asset, but the layers of financial engineering made Atlas much more complicated than it appeared. I didn’t understand it as well as I should have and it cost us.

My initial recommendation on Atlas, then, was flawed from the get go. To make matters worse, though, I stuck with it. In my defense, the company still owned important right-of-ways in the Marcellus Shale. But the financial difficulties forced Atlas to sell assets, including a 49% interest in this crown jewel.

And the dilution keeps coming. On Monday, Atlas announced it would issue another 2.7 million units to a group of institutional investors at a price of $6.35 per unit(!), which also gives these investors the right to another 2.7 million units over the next two years -- at the same price!

The shareholders will have to share the remaining value in the company with more and more people. Owning a share in Atlas is like having an interest in a slice of pizza that keeps getting cut into more and more slices.

Ouch and double ouch.

Will I be selling my shares of APL? Probably, but I'm going to think about it over the weekend and do some analysis of my own. I'll probably defer to Chris' confession and conclusion and look for more promising pastures.

Investing is fun only if we can be unemotional and very objective about our decisions. That isn't always easy, but like you I'm striving for that kind of glorious maturity.

Natural gas might fall much farther than I and many others anticipate, but as a source of energy I still believe it is and will always be one of the best and one of the cleanest. As an investment theme, only time will tell.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Disclosure: I own some CHK, UNG and APL

Comments

[sligoo:]

For safety in numbers AND dividends, check out TYY and FEN. This move also lets you avoid the onerous tax problems associated with owning master partnerships outright,e.g. APL.

Aug 23 09:07 AM

[basehitz:]

Sub $3 NG. Tough to lay off, but a lot of questions.

UNG is at 14% premium to NAV. So far, new units recently allowed by SEC have not been issued. Then there’s the potential CTFC new position limits. And finally, UNG managers are hedging potential new regulations by selling futures and buying swaps, which carries it’s own risk.

NG defies many attempts to call a bottom and continues to drift lower.

On storage capacity, I built an offline application to try to project future storage. Weekly updates from EIA are fed in, and the 3-week avg injection projected forward. It currently predicts peak storage of 3.789 Bcf as determined by EIA will be reached Oct 23rd.

Weather.com doesn’t show any Atlantic storms currently. But it will get wild if one threatens the gulf.

The contango remains ridiculous at 16% as of Friday. The roll period was complete Aug 18th, so I would have thought it would back off. Instead it ballooned from 12% the prior Friday.

If the market corrects, typically energy moves with it.

That’s a lot of moving parts.

Last week I flipped GAZ a couple trades to avoid some of the above. Then they decided to stop issuing new shares also and their premium to NAV expanded to 7%. Also too high.

Aug 23 11:02 AM

[john s. gordon:]

i think the author means 2.50 per million btu/
> jack

Aug 23 11:22 AM

[Gary Klahr:]

The big knock on APL had been its debt problem. Since that has been alleviated, and they are promising to start dividends again next year, I would THINK that there is much more upside at this price. APL was a good short in the past--but like C and BAC, now may be the time to BUY---when NO ONE wants it. (Who ever thought you could QUADRUPLE your $$ in C in 6 weeks or BAC in 3 months??)What fool was SELLING GE below 6 that day a few mos ago???

Aug 23 10:47 PM

[Andy1234:]

One way I have been playing the energy markets is indirectly playing it. We know Canada will be exporting NG and Oil for years to come....plus they have lots of mining operations for coal and other minerals which should do well in an inflationary period......they should have a strong economy going forward with all the natural resources they have. So, as history shows, real estate is the best inflation hedge...with canada being strong in the natural resource department....and I am guessing job growth will be great in the future...wouldn't canadian REITS be one of the best places to be? I am heavily invested there with HUGE payouts....and they are rocketing upward like no other over the past 5-6 months or so. Canada's banking system is good...and the REITS aren't overly leveraged. Great spot to be for 10-20% dividends at the time I purchased....although they have shot up a lot recently.

Aug 24 08:51 AM

[Andy1234:]

and just to comment.....this has helped me...both from an investing and trading stand point.

Jesse Livermoore would let the move happen in the direction he thought it would move and then invest.....having immediate gains from an investment or trade is easier emotional wise.....even if you are right in the long term investment. Seeing those immediate gains confirms your choice.

I use range contraction trading methods for trading AND investing entries. I also wait for confirmation on the move in the direction I think the stock is going to move and make my investment right then and there.

For example....BQI is one stock I am watching that is about to break out to the upside.......if you see a powerful move upward (which is right there) we should see a large move upwards.

Aug 24 09:09 AM

[Jimbo:]

Sadly I bought APL at $25, based on its' supposedly favorable fundamentals. I rode it all the way down and finally sold at about $7.96.

Aug 24 10:43 AM

[La Marque:]

TYY has an 8.74% premium and FEN has an 9.37% premium as of close of 08/21/09. These cefs are not good buys at this time.


On Aug 23 09:07 AM sligoo wrote:

> For safety in numbers AND dividends, check out TYY and FEN. This
> move also lets you avoid the onerous tax problems associated with
> owning master partnerships outright,e.g. APL.

Aug 24 11:10 AM

[tuj:]

lol, just like every bullish NG investory, they think it "looks cheap".

Ask why we just hit a 2 handle last week....

Aug 24 12:06 PM

[Marc Courtenay:]

Thanks for the ideas and suggestions


On Aug 23 09:07 AM sligoo wrote:

> For safety in numbers AND dividends, check out TYY and FEN. This
> move also lets you avoid the onerous tax problems associated with
> owning master partnerships outright,e.g. APL.

Aug 24 01:09 PM

[Marc Courtenay:]

Yes I did. Thanks for the clarification.


On Aug 23 11:22 AM john s. gordon wrote:

> i think the author means 2.50 per million btu/

Aug 24 01:11 PM

[Marc Courtenay:]

Thanks Andy. Very useful insights and ideas.


On Aug 24 09:09 AM Andy1234 wrote:

> and just to comment.....this has helped me...both from an investing
> and trading stand point.
>
> Jesse Livermoore would let the move happen in the direction he thought
> it would move and then invest.....having immediate gains from an
> investment or trade is easier emotional wise.....even if you are
> right in the long term investment. Seeing those immediate gains confirms
> your choice.
>
> I use range contraction trading methods for trading AND investing
> entries. I also wait for confirmation on the move in the direction
> I think the stock is going to move and make my investment right then
> and there.
>
> For example....BQI is one stock I am watching that is about to break
> out to the upside.......if you see a powerful move upward (which
> is right there) we should see a large move upwards.

Aug 24 01:13 PM

[Marc Courtenay:]

Yes, I'm aware of the NAV premium, and yes, it does concern me. If UNG figures out a way to issue more shares and units, perhaps we will see some dilution, which might reduce the share price somewhat more in the weeks to come. Today UNG is up over 2% while natural gas is up 5%.


On Aug 23 11:02 AM basehitz wrote:

> Sub $3 NG. Tough to lay off, but a lot of questions.
>
> UNG is at 14% premium to NAV. So far, new units recently allowed
> by SEC have not been issued. Then there’s the potential CTFC new
> position limits. And finally, UNG managers are hedging potential
> new regulations by selling futures and buying swaps, which carries
> it’s own risk.
>
> NG defies many attempts to call a bottom and continues to drift lower.
>
>
> On storage capacity, I built an offline application to try to project
> future storage. Weekly updates from EIA are fed in, and the 3-week
> avg injection projected forward. It currently predicts peak storage
> of 3.789 Bcf as determined by EIA will be reached Oct 23rd.
>
> Weather.com doesn’t show any Atlantic storms currently. But it will
> get wild if one threatens the gulf.
>
> The contango remains ridiculous at 16% as of Friday. The roll period
> was complete Aug 18th, so I would have thought it would back off.
> Instead it ballooned from 12% the prior Friday.
>
> If the market corrects, typically energy moves with it.
>
> That’s a lot of moving parts.
>
> Last week I flipped GAZ a couple trades to avoid some of the above.
> Then they decided to stop issuing new shares also and their premium
> to NAV expanded to 7%. Also too high.

Aug 24 01:29 PM

[Marc Courtenay:]

I hope you are right, but today there is a bloodbath today in APL on heavy volume. I hope it means some big players are accumulating for the next big run-up. On Yahoo! Finance, their daily interactive chart, there's a big block trade of 82,000 shares at 5.925 four minutes after the opening (9:34am EST) and most of the rest of the down volume for the day from that time has been smaller blocks but a heck of a lot of them. I still have my APL only because I'm betting (and believe me it is a gamble) that those 1 million shares that someone bought today under $6 a share might be worth more down the road. It might be a sucker's bet, so you'll have to figure this out for yourself if you, like me, decided to hold your shares. Let's also hope they resume their dividend payout, as that would help.


On Aug 23 10:47 PM Gary Klahr wrote:

> The big knock on APL had been its debt problem. Since that has been
> alleviated, and they are promising to start dividends again next
> year, I would THINK that there is much more upside at this price.
> APL was a good short in the past--but like C and BAC, now may be
> the time to BUY---when NO ONE wants it. (Who ever thought you could
> QUADRUPLE your $$ in C in 6 weeks or BAC in 3 months??)What fool
> was SELLING GE below 6 that day a few mos ago???

Aug 24 01:36 PM

[Gigem77:]

Natgas storage stats for 5 years by week americanoilman.homeste...

Spot natgas prices around the country intelligencepress.com/.../
Natgas is under 2.50 out west and will fall further as storage fills. Watch the pipeline and storage operators for OFOs, Operational Flow Orders, forcing curtailment. The injections to storage will diminish, not because supply is diminished but because pipeline and storage pressure is high. It is way too early to get bulled up on natgas.

Aug 25 06:08 AM

[FRANJUST62@...:]

I PURCHASED APL @ $33.00 ALMOST A YEAR AGO,BASED ON MSNBC/ANY MANY MORE EXPERTS. NOTHING HAS CHANGED FROM A YEAR AGO, THE COMPANY IS STILL IN BUSINESS. WITH DOWN DEBT AP WILL RISE AGAIN WITH THE START OF DIV 1ST QUARTER 2010

Aug 25 12:04 PM

[kstock:]

Utility usage of natural gas should increase to an extent due to the heavy subsidies being offered by the Obama administration. This directly affects the CNG bus fleet operated by the U.S. Public transportation system. Yahoo Finance has more details on this:
finance.yahoo.com/news...

Sep 22 11:03 AM

[Marc Courtenay:]

As a P.S.: I finally decided to sell my shares of APL on 9/25/09 and replaced that money with shares of EPD. Hope it works out and I'm glad I decided to wait until now.

Sep 26 06:14 PM