Natural gas prices have been depressed for just a few years, but
it feels like a lot longer. Numerous analysts (myself included)
have tried to
the bottom for this clean, abundant energy source, angling for the
moment when supply comes down to -- and below -- the level of
Back in January,
might finally buck up once the domestic natural gas rig count
slipped below 725.
By then, natural gas prices had slid from $6 per thousand cubic
) to about $2.50, but the bottom wasn't in yet. The rig count kept
falling, piercing the 700 mark and then the 600 mark, and still,
gas prices couldn't find a floor. (The rig count now stands at 534
if you're keeping score.)
Yet just as most investors have thrown in the towel, they may
have missed an important turn. Look at this two-week chart for
Since late April, natural gas is up more than 40%.
It's safe to say that almost no one saw this coming.
Why the spike?
Gas has been in an uptrend for precisely the reason you'd expect.
Demand is steadily rising (thanks in large part to the ongoing
switch at power plants from coal to gas), and supply, if not
shrinking, at least is no longer surging. The most recent price
gains, which began on June 14, came from a U.S. Energy Information
Administration report that highlighted a 67 billion cubic feet
build in gas inventories, which is unusually low (compared with the
more normal 88 BCF) for a period that is typically characterized by
weaker demand ahead of the peak July and August summer season.
The fact that it has been unusually hot in much of the United
States in recent days (and expected to stay that way for awhile) is
leading gas traders to expect a faster-than-normal drawdown in
inventories in the weeks ahead.
Short-covering also gets some of the credit.
gas traders have been unwinding their positions, whichmeans that
further near-term gains are likely to be more muted -- if the
short-covering process is nearly complete.
Still, natural gas producers must be downright giddy. The
difference between $2 and $3 gas is the difference between losses
(and funding pressures) and robust profits. If gas is able to hold
its own in the $3 range and move toward $3.50 a year from now, as
contracts imply, then the entire tone of media coverage and
analysis will pivot back to bullishness -- and smart investors will
With this in mind, here's a look at some of the top natural gas
ideas from my esteemed colleagues here at StreetAuthority. To be
honest, the timing on some of our calls have been off (as I
mentioned before, few have been able to correctly time natural gas
price movements), but these views look much more timely now.
Our best ideas
Despite its name,
Ultra Petroleum (NYSE:
derives more than 90% of its revenue from natural gas. Roughly four
months ago, Tim Begany
spelled out why
he thinks this company's profits could double by 2016.
have moved up from $18 to $23 over the past three weeks, and
according to Tim, have ample further upside ahead.
Perhaps the most controversial stock in the natural gas sector
also happens to be a favorite of my colleague Nathan Slaughter,
editor of our
Scarcity & Real Wealth
newsletter. In a recent article, Nathan
laid out the case
Chesapeake Energy's (NYSE:
impressive base of assets will eventually override the current
concerns over debt loads. Rising gas prices surely strengthen
Firmer gas prices should eventually lead drillers to tap more
wells. To gain access to gas buried deep in shale formations, these
drillers will need to hydraulically fracture (or "frack") the shale
to access the gas beds. In
a separate article
, Nathan looked at the companies providing the tools and services
to make that happen. Those companies -- and the stocks behind them
-- look to benefit in a major way.
My favorite pick
My favorite stock pick in this space is still
Marathon Oil (NYSE:
, which has thus far been a losing pick in my
$100,000 Real-Money Portfolio
due in large part to its legacy exposure to crude oil. Yet as I
noted back in February, Marathon's $3.5 billion 2010 purchase of
Hilcorp will make it a major player in the highly-productive Eagle
Risks to Consider:
is one of the reasons behind the upward move, long-oriented
traders may now look to book profits, which could cause these
stocks to pull back somewhat.
Action to Take -->
Forecasts for continued hotter-than-normal temperatures across much
of the United States for the next few weeks could push natural gas
prices even higher. Any hurricane activity in the Gulf of Mexico
would be an additional potential
. On the upcoming round of quarterly conference calls, look for
companies to revise their
outlooks. Last quarter, they were bracing for a world of $2 gas.
But $3 gas changes everything. And if prices indeed remain firm,
then you'll want to position yourself to
from stocks in this space.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CHK, MRO in one or more if its "real money"
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