Why Natural Gas Is an Excellent Long-Term Investment Option

 |  Includes: FCG, GASL, GASX, GASZ, OGZPY
by: Disruptive Investor

In an investment environment characterized by the swift flow of money from one asset class to another, it is not easy to determine some definite long term outperformers. Asset classes which are backed by strong fundamentals are likely to outperform in the long term, even if they underperform in short-term as a result of money flow and excessive speculation in some asset classes.

Natural gas is one investment theme, which has the potential to generate robust returns in the long term. This article discusses the fundamentals for the investment theme and the probable ways of investing in the asset class.

At the very onset of this study, I would like to point out that adjusted for inflation, natural gas happens to be significantly undervalued. Hence, keeping other factors constant, there is significant room for upside from current levels.

As the chart below shows, the natural gas prices have moved from USD2/MMBtu in the year 1993 to approximately USD4/MMBtu (currently). When adjusted for inflation, prices have only risen by only 32% over the last 17 years.

Click on charts below to enlarge:
Click to enlarge
Chart Source: BP

During the same period, the consumption of natural gas globally has increased from 1854Mtoe to 2858Mtoe.
Click to enlarge

In my opinion, the demand for natural gas will continue to increase in the long term. This growth will be primarily driven by China and India, where the per capita consumption of natural gas is still relatively low. With demand coming from 2.4 billion people in these two countries, a significant upside is expected in consumption in the coming decade and further. This will drive natural gas prices to higher levels.

Click to enlarge
Chart Source: BP

The expectation of prices trending upwards in the long term is further backed by the fact that the reserve to production (R/P) ratio for natural gas has been on a decline globally. In other words, the new reserve addition for natural gas has not been able to match with the production and consumption growth. This is clearly bullish for the prices over long term. As of end 2010, the world had proved natural gas reserves sufficient to meet 58.6 years of global production.

Click to enlarge
Chart Source: BP

These factors combine to make natural gas an excellent investment option for long term. In terms of considering exposure to the investment theme, investors can –
  1. Consider buying the Russian Ruble, which happens to be significantly undervalued (on a relative basis)

  2. Consider exposure to natural gas storage and transportation companies (primarily in the Middle-East region)

  3. Consider exposure to selective companies such as Gazprom (OTCPK:OGZPY)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.