Investors who are looking to the XNG:NYSE Natural Gas Index to
tell them the future of natural gas prices could be making a costly
XNG:NYSE - which tracks large cap companies in the US natural
gas industry - has been heading up for 12 months - in the directly
opposite direction as UNG:NYSE, the high profile ETF that tracks
the price of natural gas. UNG has been going down for 12 months,
and set a new 52 week low late last week.
How can two related natural gas charts go in opposite directions
for so long? If equities lead commodity prices, which one should
investors look to try and make money?
[[UNG]] is supposed to track the natural gas commodity price in
the US, based on the near month contract on the Henry Hub in
(There are several natural gas "hubs" where natural gas prices
are quoted around the US, but the Henry Hub is what most media
quote - and while there used to be a big difference between the
regional hubs, increased pipeline capacity around the US has
lowered those differences a lot.)
[XNG measures the stock performance of a basket of large cap
companies in the natural gas industry - but they are not all
producers. Some are pipeline, transportation and transmission
Look at the two charts, which at first blush I would expect to
mirror each other - the underlying commodity and the equities that
should track that commodity:
(Click to enlarge)
(Click to enlarge)
So what gives with that? Does one of these charts have to
The short answer is "not really," and it has to do with how the
index is made up, and how some of the companies in the index do
business (I've listed them alphabetically at the bottom of this
Two of them, Kinder Morgan (
) and Williams (
) are pipeline companies, not natural gas producers. Now, the main
reason the natural gas price is so low is because US production is
increasing again after years of decline. So it only makes sense
that if you are pumping more gas out, the pipeline companies are
making more money.
The stock price of Kinder Morgan was going up anyway, but as
soon as their Rockies Express pipeline from Colorado to Ohio went
live last fall, their stock took off even more. They're up more
than 50% in the last 12 months. Williams is almost a double.
Second, several of the producers in the index have been very
high profile about transforming themselves into oil-weighted
companies as fast as they can find deals and if need be, raise the
money. Apache Corp. (
) spent $5 billion in just one week in April 2010 buying two sets
of oil assets in the Gulf of Mexico (Too bad for them it was before
the BP spill). Chesapeake (
) has been very vocal since February that it wants to become a lot
more oil weighted.
On February 25 2010, EOG Resources (
) CEO Mark Papa said it "can no longer be considered primarily a
natural gas company." - and the stock jumped more than 25% in two
And of course XTO (
) is being bought out by Exxon (
) for stock, so their stock will track Exxon - the largest
independent oil company in the world - until that deal closes. XTO
stock has nothing to do with the price of natural gas now.
And lastly, several of the companies are integrated producers,
meaning they not only produce the gas out of the ground, (called
business) but also have pipelines and other infrastructure that
deliver the gas to customers (called the
business). As I mentioned with the pipeline companies - they're
doing a lot better.
So, for those reasons, the XNG stock index and the UNG commodity
index - even though they're both tracking different parts of the
natural gas industry - don't necessarily have to have a tight,
Investors could be tempted to look at XNG, and because stocks
lead commodity prices - the market usually predicting where prices
will be 9 weeks to 9 months out - as a barometer of where natural
gas prices could be in the future. But the XNG has pipeline
companies, and several producers who are moving away from natural
gas as fast as they can. It's not just natural gas producers.
So that investment hypothesis could be a costly mistake.
The XNG index is currently made up of:
[[APA]] - Apache Corp.
[[APC]] - Anadarko Petroleum Corp.
[[CHK]] - Chesapeake Energy Corp.
[[DVN]] - Devon Energy Corp.
[[EOG]] - EOG Resources
[[EP]] - El Paso Energy Corp.
[[GAS]] - Nicor Inc.
[[NBL]] - Noble Energy Inc.
[[NFG]] - National Fuel Gas Company
[[NI]] - NiSource Inc.
[[STR]] - Questar Corp.
[[SWN]] - Southwestern Energy Corp.
[[UPL]] - Ultra Petroleum
[[WMB]] - Williams Companies Inc.
[[XTO]] - XTO Energy
39 S&P 400 Mid Cap Companies Yielding +4%