There aren't many bright spots in the US economy, but one of them is certainly natural gas. And for investors, the natural gas story got even better this past week thanks to US President Barack Obama's State of the Union address, which announced support for natural gas and hydaulic fracturing (aka "fracking") -- an enabling technology that allows greater quantities of natural gas to be procured at lower prices, thus making natural gas an even more appealing source of energy, as well as a resource that the US could leverage to create jobs, boost exports, and reduce the trade deficit.
This is set against the back drop of rising oil prices due to tensions in the Middle East, inflationary monetary policy, and the onset of peak cheap oil. And the story gets even better when we consider the lack of alternatives there are for oil:
- While I wouldn't bet against coal, it is unpopular and politically unfavorable due the environmental damage it unleashes.
- Solar and wind lack sufficient energy density to serve as a significant source of energy for an industrial society.
- Nuclear is the best in many ways, though it is still unpopular in the wake of Fukushima and more importantly, it is more capital-intensive and thus takes more time (though I am very bullish on nuclear and it is the largest part of my stock portfolio outside of gold-related investments).
Accordingly, the stage is set for capital to rush into the natural gas sector. I'd go so far as to say the gains that we saw in 2007 in the solar sector will serve as an example of what we'll see this time as well in the natural gas sector. The chart below is of First Solar (FSLR); note the 10X gain in 2007 shareholders had the opportunity to earn.
click to enlarge
In light of the macroeconomic environment, in which ongoing stimulus is introduced to delay the sovereign debt crisis from being immediately and suddenly realized via a deflationary spiral results in asset price inflation across the board, I think the natural gas sector is a strong candidate from where another bubble will emerge.
In terms of how to play this, the standard suggestion would be to capture the entire sector via an ETF like (GAZ) or (UNG). These days, though, I'm becoming more distrusting of ETFs, and have a growing bias towards identifying single stocks I think can outperform the market. GasFrac Energy Services (OTCPK:GSFVF) is one on my radar thus far as one of the most likely candidates, though I'm still doing my due diligence here.
I do believe the clock is ticking, though, and that investors who want to get in on this opportunity should have their picks made by the end of the first quarter of this year.