Remember all of the negative headlines a few months ago when
the price of natural gas was falling like a stone?
What you probably haven't heard lately is that natural gas
prices are on the rebound in a substantial way. Since mid-April,
natural gas is up nearly 50%.
Of course, after months of negative news, the market is burnt
out on natural gas. Which means it's probably worth looking into
I was a little ahead of the curve.
On April 30th, I bought a stake in America's largest pure play
Chesapeake Energy Corporation (
in my personal brokerage account.
The company then immediately got
by bad news. Not only were natural gas prices depressed, but
there were some concerns about possible corporate malfeasance
from the founder and then CEO of the company,
Of course it was bad news for the company. And the company was
in dire straits in terms of profitability too.
But the important thing to remember when you're looking for a
resource asset is to find the companies that own the best of the
best. And Chesapeake still owned huge stakes in natural gas
assets in the best gas (and oil) producing regions of North
Mr. McClendon's alleged improprieties didn't change the
reality that Chesapeake owns some of the best properties in the
But Chesapeake plummeted from an annual low of $18.05 (my
initial buy price) down to $13.55 by the middle of May.
That's a 25% loss I was sitting on.
Materially though, nothing had changed.
calls this kind of activity a "great investment opportunity"
because it's essentially a "huge but solvable problem" that
momentarily drops the price of the investment.
It's good news when an asset you want to own goes on sale - as
long as the asset itself is basically unchanged.
You might note that I didn't buy more shares of Chesapeake -
but let's look at the lesson from a larger perspective. Natural
gas prices are still depressed.
They're barely up from their decade lows of $1.90 per thousand
cubic feet (
And we know why they're depressed: because of a glut of
production and supply in the North American market.
That sounds like a huge problem that will be solved by time.
The basic asset itself is the same. It's just the price that has
So while I don't necessarily recommend picking up shares of
Chesapeake right now (shares are up 45% since mid-May), the
lesson is intact.
Be on the lookout for quality natural gas assets when they're
on sale. For starters, take a look at a company called
Devon Energy (
. They're a domestic natural gas producer, just like Chesapeake,
but they have much less debt and they haven't had the same kind
Look for prices below $60 a share, and if shares fall below
$55 that's a great entry point.