Bruce Pile

Avoid (Natural) Gassy Stocks

I've been saying for over a year now that there will be a growing disconnect away from the traditional oil/gas pricing ratio of around 6. For the several decades of the oil age, this ratio was a pretty reliable pricing guide where, if it got too far out of synch, you could expect oil to come down, gas to go up, or whatever. But since about 2006, when this disconnect first started to be noticed and written about, there have been two big changes from the previous decades - one, conventional oil has come up against the forces of peak oil, and two, the shale nat gas recovery advances have made the impending North American gas shortage a thing of the past.

If you look at a gas/oil ratio chart like $NATGAS:$WTIC at SharpCharts, you see that we have recently broken below the trading range bounded by about .07 at the low end for the first time in years. This really makes the whole nat gas stock investing area a little too unpredictable for my taste. Aubrey McClendon of CHK seems quite confident in the gas business with his large insider buying, and he isn't the only gas company official grabbing up insider shares. He is very aware of the plentiful supply of gas and has even hinted at the notion of building more LNG facilities here in America so we can export to the global LNG trade. The technical behavior of the gas stocks sure doesn't suggest doom and gloom for the industry.

As for the domestic land drillers behaving well in the face of low gas prices, I can see that because the new shale gas, while plentiful, is much more drilling intensive than the old conventional gas - and getting much more drilling intensive very quickly. It has been referred to as an accelerating treadmill by industry experts, where the athlete is the driller who must keep running harder just to keep the supply constant.