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Commodity Review: Investing In The Natural Gas Blues

|Includes:FCG, The United States Natural Gas ETF, LP (UNG)

Natural gas prices are at record lows (to the $2.25 per million BTU level) and investors should not expect prices to rise any time soon - even as natural gas is being toted as the energy that can save the USA from dependence on OPEC oil.

So why have natural gas prices fallen so much? For starters, natural gas prices are dependent on the short-term supply and demand situations while storage facilities are limited - meaning demand and supply can get out of whack fairly quickly and dramatically. Moreover, supply does not fall as quickly as producers will still need to extract natural gas thanks to leasing terms (e.g. use it or loose it) or to repay their loans. Hence, the exceptionally warm winter means there is now an oversupply as consumers used less gas to heat their homes. Finally, US demand to natural gas for residential and commercial uses (e.g. cooking, heating and hot water) has been flat for a decade with only electrical uses growing.

On the other hand and in a recent economics conference sponsored by the Wall Street Journal, legendary Texas oil and gas entrepreneur and financier T. Boone Pickens along with Edward G. Rendell, the former Governor of Pennsylvania, discussed the boom in natural gas and how it can literally change everything. In fact, T. Boone Pickens called it a global game changer because natural gas can change the power of energy away from OPEC.

Hence, an investor looking at betting on natural gas prices (eventually…) rising from record lows (perhaps if next winter is less mild) could consider the United States Natural Gas Fund LP (NYSEARCA:UNG) that attempts to track movements in natural gas prices. However, UNG is also down 33% since the start of the year, down 63% over the past year and 91% over the past five years.

Hence, a much better idea for investors would be the First Trust ISE Revere Natural Gas ETF (NYSEARCA:FCG) which attempts to replicate the returns of the ISE-REVERE Natural Gas Index - an index containing companies that derive a substantial portion of their revenues from the exploration and production of natural gas. FCG is up over 1% since the start of the year but it's also down about 20% over the past year and down almost 7% over the past five years. The fund's top 10 holdings include the following stocks:

  1. Murphy Oil (NYSE:MUR)
  2. Stone Energy (NYSE:SGY)
  3. Noble Energy (NYSE:NBL)
  4. Exxon Mobil (NYSE:XOM)
  5. EOG Resources (NYSE:EOG)
  6. SandRidge Energy (NYSE:SD)
  7. Apache Corp. (NYSE:APA)
  8. Questar Corp. (NYSE:STR)
  9. Anadarko Petroleum Corp. (NYSE:APC)
  10. Encana Corp. (NYSE:ECA)

On the other hand, it's also worth mentioning that in a short opinion piece for USA Today, the Sierra Club criticized the natural gas industry and concluded that it was "dirty, dangerous and putting American families at risk." The Sierra Club article further noted that the industry remains exempt from key aspects of laws such as the Clean Air Act, the Clean Water Act and the Safe Drinking Water Act while hydraulic fracturing or fracking, which involves drilling thousands of feet and injecting millions of gallons of water, sand and chemicals into shale in order to extract gas, remains highly controversial. Hence, investors might want to take a closer look at these small cap stocks that are involved in or are getting involved in fracking wastewater treatment:

  • Abtech Holdings (OTC: ABHD)
  • BioLargo (OTC: BLGO)
  • Canyon Services Group (TSE: FRC)
  • Ecosphere Technologies (OTC: ESPH)
  • GreenHunter Energy (AMEX: GRH)
  • Heckmann Corporation (NYSE: HEK)
  • Imperial Resources (OTC: IPRC)
  • Seair (CVE: SDS; SARCF)

Of course and as you can see from the exchanges that most fracking wastewater treatment stocks trade on, an investment in one of these stocks will not be without risks.

Nevertheless, natural gas is clearly an industry to be watching and it might be wise to add a few natural gas focused stocks or funds to your Next Candle my portfolio list to keep an eye on them and to help you come up with an appropriate trading strategy should natural gas prices finally bottom out and show signs of rising again.


Stocks: UNG, FCG