Natural Gas Looks Intriguing From a Long-Term, Contrarian Perspective

 |  Includes: CHK, ECA, FCG, GAZ, UNG, UNL
by: Market Blog

By David Berman

Scarcity is always good news for a commodity-based investment. But when it comes to natural gas, scarcity doesn’t seem to be an issue these days.

Analysts at JPMorgan Chase & Co. recently estimated that the United States is sitting on an amazing eight trillion cubic feet of natural gas, or more than four times an earlier estimate.

In Canada, the Canadian Society for Unconventional Gas estimates the country has gas deposits of another four trillion cubic feet. Encana Corp. (NYSE:ECA), in particular, recently announced plans to double its gas production within five years, something oil producers can only dream about.

None of this suggests that already-depressed natural gas prices are going to shoot higher in the near term. The price of natural gas has fallen more than 20 per cent this year, and it is down nearly 70 per cent from its recent high in 2008.

Few investors are interested in the commodity, and many share prices reflect this lack of interest. Chesapeake Energy Corp. (NYSE:CHK) shares are down 13 per cent his year, to a five-year low. Encana shares are down about 2 per cent. (Share prices of oil producers are also down, but this is due to concerns about the global economy, rather than massive quantities of oil being discovered.)

However, natural gas is intriguing from a longer-term, somewhat contrarian perspective. While it is true that the supply picture is anything but uplifting for natural gas prices – and the stocks of natural gas producers – what if demand were to pick up?

On that note, follow the latest thoughts from legendary energy investor T. Boone Pickens. He believes that larger-than-expected quantities of natural gas have the potential to reshape the global energy landscape. In part, this is because big trucks – and the United States has eight million of them on the road today – can run on natural gas rather than diesel fuel.

“If we can move that fleet from diesel to domestic natural gas over seven years, we would reduce our dependence on foreign oil and would no longer need a drop of oil from the nations of the Organization of Petroleum Exporting Countries,” Mr. Pickens said in a recent letter to The Wall Street Journal.

Converting these trucks, with the help of government subsidies, would also put those big natural gas reserves to good use. That could drive gas prices higher, along with investor interest in the stocks of natural gas producers.

Admittedly, Mr. Pickens is talking his book here: He owns a big chunk of Clean Energy Fuels Corp. (NASDAQ:CLNE), which operates gas filling stations for existing natural gas vehicles, and would certainly benefit from having eight million more customers. But that doesn’t mean Mr. Pickens is wrong.