Oil and Natural Gas Will Decouple - Big Time

by: Greg Pinelli

Oil and Natural Gas are typically welded at the investment hip. They often occur simultaneously in developed fields and are lumped together in much the same way as physical gold and silver - ratios of one to the other are viewed historically and investibility in either looks attractive when those ratios are either high or low.

I'm going to offer an alternative view. Consider oil and natural gas as different bridges, of limited life-spans, to the future. Oil's bridge was built generations ago. It lifted early industrial, fuel powered societies thru an assisted muscle powered age to a decidedly unmuscled technological age. While there are still decades of diminishing supply left it is the fuel of the past. Literally, that bridge has been crossed. Natural gas will, of necessity, carry us over a shorter time span to the next energy bridges, most likely some version of much cleaner coal, nuclear power, and wind/solar power. Even those future generation sources will not be final answers, but in investing, final answers are not necessary. Only profitable ones.

Three factors are critical for Natural Gas.

1. The sources must be local in a broad sense. Pipelines are local. LNG is not.

2. The sources must be secure geoplitically and they must depend on an extensive, well constructed and maintained infrastructure.

3. The sources must currently be extensive enough to be depended on for reliable near supply, and the greater geographical area promising for some future development of reserves.

Look to some of the following to provide reliable current, and reasonable future, returns.

1. Natural Gas Services (NYSE:NGS) and Grant Prideco (GRP RETIRED)/ National-Oilwell Varco (NYSE:NOV) for the nuts and bolts of gas delivery.

2. Energy Products (NYSE:EPD) for fractionation (Natural Gas refining and breakdown) and transport, BlackRock Global Energy & Resources Trust (NYSE:BGR) for a broad based safe haven closed end fund that gives a diversified portfolio of gas infrastructure equities at a 10% plus discount to NAV.

3. Linn Energy (LINE) and Penn West (NYSE:PWE) for long term reserve production and dividend streams. Natural Gas is going its own way..and it will be a highly profitable one.

Disclosure: I have, or have had, positions in all of the above. I wouldn't recommend anything that wasn't worth my own money.