My Preferred Way of Investing in Natural Gas

In July of last year I wrote that the United States Natural Gas Fund ETF (UNG) looked ripe for gains after a 30% drop from $54 to $38 per share. In recent weeks natural gas has become a hot commodity, with prices hitting $10 last week, up from under $6 last year.

UNG shares have jumped 25% to $47 each, and I think some profit taking is in order. Long term I still like energy in general and gas specifically, but at this point I think owning hedged exploration and production stocks makes more sense than owning the gas ETF after such a large increase in underlying commodity price.

Which gas stock would I point readers toward? Long time readers will be bored with this company, but Chesapeake Energy (CHK) continues to be my favorite domestic natural gas stock (newer readers can refer to my September 2006 piece entitled An Attractive Entry Point For Chesapeake Energy).

Like UNG, CHK too has risen sharply (from $29 to $44 since that bullish article), but it has the advantage of being able to hedge prices for its ever-growing production, so it will get hit much less than UNG during the next natural gas sell off, which will surely come despite the recent renewed enthusiasm for the commodity.

Full Disclosure: Long CHK at the time of writing.

Comments

[ellwodo]

I couldn't agree more about CHK. I assume you have noticed that so far in 2008 the Chairman has bought 1.6 million shares in open market purchases (not option exercises). That's over $60 million of stock in a little more than two months. You have to admire his enthusiasm.