Seeking Alpha
Oil & gas, long/short equity
Profile| Send Message|
( followers)  

Summary

  • Assessing the impact of the cold winter on Natural gas inventory.
  • Investment opportunity 1 : ProShares Ultra DJ-UBS Natural Gas (BOIL).
  • Investment opportunity 2: United States Natural Gas (UNG).
  • Investment opportunity 3: Helmerich & Payne (HP).

The winter of 2013 was one of the coldest winters that people have experienced in recent times. This cold wave ensured that people stayed indoors and turned on their heaters in full swing. This might have impacted much of the economy on a larger scale and we shall soon find out as the earnings season kicks in. But this winter has definitely taken a huge toll on the natural gas inventory which has fallen to the lowest level in a decade.

Below is a graph of the natural gas inventory in the US as published by the US Energy Information Administration. The grey band shows the maximum and the minimum level of inventory in the past five year period and the light blue line shows the current level of inventory of natural gas.

There are two seasons with regards to natural gas. In the warmer months from April to October the natural gas is pumped out from the reservoirs and stored. This stored natural gas is then used during the winter months of November to March.

As of 4th April 2014, the natural gas inventory stands at 826 billion cubic feet down from a high of 3,834 billion cubic feet in November 2013. The target level of inventory is definitely above 3500 billion cubic feet to be achieved by November 2014. There are 32 weeks between April and November (assuming the winter in 2014 does not begin earlier). That means an average of 83 billion cubic feet of gas has to be pumped out each week in order to prevent an adverse spike in gas prices.

Table 1 below shows the amount of natural gas pumped out each week in 2013 and 2012. For 2013, the average rate of gas being pumped out was 69.7 billion cubic feet and for 2012, it was 45.8 billion cubic feet. This basically shows that our target of around 83 billion cubic feet for 2014 is not an easy task.

Here is the best part!

Thanks to Baker Hughes we also have data for the number of rigs drilling for natural gas. Here is a 10 year chart:

And here is a chart focused on the last 2 years:

These charts show that the number of rigs drilling for gas today is significantly less than the last two years. Since gas prices had stayed low for the past several months, most of these rigs had been diverted to drill for oil instead of gas. Whether a large number of rigs can be shifted to drill for gas in such a short duration is questionable.

To sum up, all things are lined up in favor of a hike in natural gas prices towards the end of the year if the pumping season does not live up to expectations. What are the ways to play this spike?

ProShares Ultra DJ-UBS Natural Gas (NYSEARCA:BOIL): This is a leveraged ETF, which means that if natural gas prices go up by 10%, this ETF goes up by 20%. Investors can consider buying this ETF or buying call options for those who prefer lesser risk and higher returns. Longest maturity for the call option is September 2014 and the cost of an at-the-money call is $830.

Another cheaper way to bet is United States Natural Gas ETF (NYSEARCA:UNG). Investors can choose to buy the ETF directly or to but the call options. An investment in the Jan 2015 at the money call option would cost around $300. This ETF is not leveraged, so if natural gas prices go up 10%, this would move by 10%.

My all time favorite stock is Helmerich & Payne (NYSE:HP) which I have been long since $40. This company makes the best drilling rigs that can be leased in the market today and here is the link to a detailed analysis of the company that I had published in June 2012 when the stock was at $40. I still recommend a buy rating on this stock at its all time high price of around $108.

2014

2013

2012

Week ending

Inventory (BCF)

Week ending

Inventory

Inventory build up

Week ending

Inventory

Inventory build up

03-Jan-14

2817

04-Jan-13

3316

06-Jan-12

3377

10-Jan-14

2530

11-Jan-13

3168

-148

13-Jan-12

3290

-87

17-Jan-14

2423

18-Jan-13

2996

-172

20-Jan-12

3098

-192

24-Jan-14

2185

25-Jan-13

2802

-194

27-Jan-12

2966

-132

31-Jan-14

1923

01-Feb-13

2684

-118

03-Feb-12

2888

-78

07-Feb-14

1693

08-Feb-13

2527

-157

10-Feb-12

2761

-127

14-Feb-14

1443

15-Feb-13

2400

-127

17-Feb-12

2595

-166

21-Feb-14

1348

22-Feb-13

2229

-171

24-Feb-12

2513

-82

28-Feb-14

1196

01-Mar-13

2083

-146

02-Mar-12

2433

-80

07-Mar-14

1001

08-Mar-13

1938

-145

09-Mar-12

2369

-64

14-Mar-14

953

15-Mar-13

1876

-62

16-Mar-12

2380

11

21-Mar-14

896

22-Mar-13

1781

-95

23-Mar-12

2430

50

28-Mar-14

822

29-Mar-13

1687

-94

30-Mar-12

2472

42

04-Apr-14

826

05-Apr-13

1673

-14

06-Apr-12

2478

6

12-Apr-13

1704

31

13-Apr-12

2501

23

19-Apr-13

1734

30

20-Apr-12

2548

47

26-Apr-13

1777

43

27-Apr-12

2576

28

03-May-13

1865

88

04-May-12

2606

30

10-May-13

1964

99

11-May-12

2667

61

17-May-13

2053

89

18-May-12

2744

77

24-May-13

2141

88

25-May-12

2815

71

31-May-13

2252

111

01-Jun-12

2877

62

07-Jun-13

2347

95

08-Jun-12

2944

67

14-Jun-13

2438

91

15-Jun-12

3006

62

21-Jun-13

2533

95

22-Jun-12

3063

57

28-Jun-13

2605

72

29-Jun-12

3102

39

05-Jul-13

2687

82

06-Jul-12

3135

33

12-Jul-13

2745

58

13-Jul-12

3163

28

19-Jul-13

2786

41

20-Jul-12

3189

26

26-Jul-13

2845

59

27-Jul-12

3217

28

02-Aug-13

2941

96

03-Aug-12

3241

24

09-Aug-13

3006

65

10-Aug-12

3261

20

16-Aug-13

3063

57

17-Aug-12

3308

47

23-Aug-13

3130

67

24-Aug-12

3374

66

30-Aug-13

3188

58

31-Aug-12

3402

28

06-Sep-13

3253

65

07-Sep-12

3429

27

13-Sep-13

3299

46

14-Sep-12

3496

67

20-Sep-13

3386

87

21-Sep-12

3576

80

27-Sep-13

3487

101

28-Sep-12

3653

77

04-Oct-13

3577

90

05-Oct-12

3725

72

11-Oct-13

3654

77

12-Oct-12

3776

51

18-Oct-13

3741

87

19-Oct-12

3843

67

25-Oct-13

3779

38

26-Oct-12

3908

65

01-Nov-13

3814

35

02-Nov-12

3929

21

08-Nov-13

3834

20

09-Nov-12

3911

-18

15-Nov-13

3789

-45

16-Nov-12

3873

-38

22-Nov-13

3776

-13

23-Nov-12

3877

4

29-Nov-13

3614

-162

30-Nov-12

3804

-73

06-Dec-13

3533

-81

07-Dec-12

3806

2

13-Dec-13

3248

-285

14-Dec-12

3724

-82

20-Dec-13

3071

-177

21-Dec-12

3652

-72

27-Dec-13

2974

-97

28-Dec-12

3517

-135

Avg build up in pumping season

69.70

Avg build up in pumping season

45.88

Source: Is A Spike In Natural Gas Price Imminent?