Natural gas prices have declined again thanks to a break from the cold and snow of the last six weeks, but it is worth noting, I think, that underground storage of natural gas was 6% below its five year average. Even better than that is the fact that natural gas futures are back below $4.
What's going on with natural gas now after its decline in late January?
Back in early November, I recommended a buy on anything of quality related to natural gas when it falls below $4. Shortly after that, natural gas futures (Henry Hub) rose from a low of $4 per btu on the NYMEX futures exchange to a high of $4.78 on Jan. 21, for a 19% gain. The NYSE Arca Natural Gas (XNG) index, which weighs some of the big oil and gas companies like Apache (APA) and Andarko (APC), opened at 576 points the day SeekingAlpha ran my take on natural gas. It was trading at an intraday high of 658 points on Friday, Feb. 18, for a short term gain of 14.3%.
The natural gas index and the natural gas futures market don't correlate because the index is impacted by the oil and services side of the energy business, while futures, of course, are a pure play derivative of the actual product. Natural gas prices are below $4 again, so I stand by my call that a buy of anything of quality within natural gas is a decent long bet. Stock pickers looking to buy the natural gas names should wait, however, for some pull backs and start dipping on the lows for long term holds. Those who prefer liquidity and diversity in one fell swoop might want to look at the First Trust ISE Revere Natural Gas (FCG) exchange traded fund. It's followed the gains of natural gas futures pretty well, and is up 14.8% since my buy recommendation published in SeekingAlpha on Nov. 11. Year to date, FCG is up around 9% as of Friday, Feb. 18.
Why the bullish call on natural gas?
It is without question that natural gas is the future, dominant player in a cleaner fuel economy in this country. We will always be dependent on oil, but in the decade ahead we will see usage of natural gas increase on many levels. I believe Exxon (XOM) sees the future clearly and knows that at some point we will see shortages of oil and is going to invest more in natural gas. Compared to oil, natural gas production is dirt cheap. And apparently easier to find. Egypt is becoming an oil importer now, and is relying more on natural gas. The Energy Information Administration recently stated that energy from natural gas accounts for 23% of the total energy consumed in the United States, and we are still a net importer. It is without question that natural gas remains the cleanest burning fossil fuel and will have a major impact in redirecting the priorities of energy and the environment. Policies will favor natural gas over coal.
We are also at this point seeing very little new drilling for natural gas close to home in Canada, Wyoming, Texas, Colorado, and New Mexico. Many of these areas have seen declines in natural gas production.
Last month's pricing for natural gas has been better for shorts, but the long term story is way more promising. Timing is everything in this market. The key is going to be to buy the quality at a discount and buy the proven reserves that represent serious money in the bank for those companies.
That is why I think investors are better off buying company names that are trading at attractive multiples. Investors should continue buying the natural gas and oil company names on the lows and stay clear of the rallies. Remember that timing is everything. I like the high quality pure natural gas plays on a total return basis, but it may make sense to look at the companies that are both oil and natural gas players in the marketplace to strengthen your position in the energy sector as a hedge against lower natural gas prices.
It's money in the bank moving forward in this sector of the market.
The greatest risk I see is that natural gas prices remain flat for the immediate future and continue to under perform. The natural gas market could be setting up for a retest of the recent lows now that we are seeing an end to the harsh winter months nationally.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.