Natural Gas Storage Is Filling Up, PAA Natural Gas Storage Should Benefit

Apr. 4.12 | About: PAA Natural (PNG)

All of the new US unconventional natural gas fields are producing so much natural gas that US storage facilities are filling up. More storage facilities can always be brought online, but for the moment the ones that already exist are going to be the ones that fill up. This means PAA Natural Gas Storage LP (PNG) should be just that much more profitable this year than most other years. The chart below shows the typical pattern of natural gas storage filling in the warmer months of the year. Then it empties in the cold months.

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As you can see from the chart above, the stored amount of gas has bottomed approximately at the end of March each year. As you can also see the current level of natural gas is about 800 Bcf above the normal amount of store natural gas at the end of March. Specifically, natural gas levels in storage are according to the EIA's latest weekly report 816 Bcf higher than last year at this time. This means the natural gas in storage should exceed the current amount of available storage (about 3900 Bcf) sometime in the summer. The chart below shows the 2006 limits for US natural gas storage capacity. Not much has changed since 2006 levels due to the intervening US recession.

All this means that PNG's storage facilities are fuller now than they normally are. It means they will reach total capacity sometime this summer. It means PNG's storage will be fuller more of the time this year (and next). It means PNG will be able to collect more money for the same facilities. Not surprisingly, there have been no insider sales among PNG management in the last six months. Instead, PNG has beaten EPS estimates by an average of 23.3% for each of the last four quarters. It may perform even better over the next two years. Analysts' EPS estimates for both years are probably too low. Its five year average EPS growth estimate per annum of 15.15% may be more accurate. Given the robust five year EPS growth figure (15.15% per year), the PE of 22.35 and the FPE of 18.63 make PNG quite reasonably priced, especially if future earnings are underestimated as I believe they are. Most of the above fundamental data is from Yahoo Finance.

If you are serious about investing in PNG, you might wish to know if the current outstripping of capacity is a short term situation. It is probably not. Instead natural gas substitutions for other types of fuels in the future are likely to lead to huge increases in the need for US natural gas storage. In 2015 the first US LNG liquefaction terminals (LNG export terminals) are scheduled to go online. The export business will require further ability to store natural gas. The EPA recently issued a new pollution guidelines proposal for new electrical generating power plants. These guidelines fit the natural gas specifications, and they are far below the coal specifications. Plus even without these proposed new rules, which may take effect in the late fall, more companies are opting for natural gas without a regulation to dictate such to them. The electrical capacity generated by coal plants was under 40% in 2011 for the first time in decades. Further there is little question that there will be a slow conversion of trucking to natural gas. Natural gas is too much cheaper than diesel for there not to be. This too will dictate that the US need more natural gas storage capacity. All of the above mean more business for PNG in the next 5-10 years.

PNG's 7.5% dividend will pay you to wait through the upcoming EU recession (and any other negative economic events that ensue). By itself, it is a good reason to buy PNG. On top of that PNG should be a good grower for many years to come. Plus the dividend should not be in danger. Rather it should grow too. This will likely make the total return on this stock north of 15% per year, and 7.5% of that will be relatively guaranteed. This is far better than bonds.

The two year chart of PNG provides some technical direction for this trade.

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The slow stochastic sub chart shows that PNG is neither over bought, nor over sold. The main chart shows a strong uptrend has been in place since October 2011. The 50-day SMA is just crossing the 200-day SMA moving upward. This is usually considered a buy signal. The fundamentals agree with this signal. The only negative point is that the overall market is over bought. It is over due for a pull back. I believe that pull back may have started this week, or it will start within the next two weeks as earnings season begins. If nothing else, guidance is bound to disappoint. Most CFO's will want to be conservative with an EU recession on the horizon. With this in mind, the best strategy may be to average in.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PNG over the next 72 hours.