The price of natural gas futures recently fell to $2.08 per gallon, a new 10 -year low. The precipitous drop in price can be attributed to a few major factors which are exerting downward pressure on the market. The largest factor in the natural gas market is the recent and rapid expansion of oil shale fracking operations in the U.S. Fracking technologies have existed since the 1960's, however they are just now becoming economically viable because of high crude oil prices and national energy independence incentives. The fracking process allows for the collection of natural gas from areas which were previously too expensive to harvest. Subsequently, there has been an explosion in the supply of natural gas on the market which has dropped the commodities price on the exchange. The graph below is a monthly ratio comparison between the price of natural gas and the price of crude oil (West Texas Intermediate). The decline in the ratio below shows that the price of crude oil is increasing relative to the price of natural gas.
Our goal as investors is to take advantage of stable long-term economic trends and profit from them. The recent trend in the natural gas market is unlikely to reverse, since the production of natural gas is still increasing. A smart investor will ask, "Which companies will benefit from a long-term production increase in natural gas?" The answer is natural gas storage facilities. All of this gas has to be put somewhere, and there is a limited amount of storage space available. These facilities take a large amount of capital and time to build, so the facilities which are in place today will be able to charge premium prices and will enjoy an economic advantage for some years to come. Below is a table and a graph which was taken from the EIA website. As you can see, natural gas storage (the red line) is significantly above its usual range. The table shows a year-to-year increase in storage stock of 55.7%.
natural gas storage companies can still be bought at attractive price to earnings ratios and are not presently overvalued by the market. PAA natural gas Storage, LP (PNG) is trading at a P/E of 23.32, and Spectra Energy Partners, LP (SEP) is trading at a P/E of 19.38. Both of these company's P/E ratios are below the utility sector's P/E, which is 24.7. These two companies will directly benefit from an increase in the supply of natural gas and so should you.
"The first rule is not to lose. The second rule is to not forget the first rule." - Warren Buffet