(A version of this article appeared in optionMONSTER's Open
Order newsletter of March 2.
As stock investors, we dream of secular bull markets. That's when
mega-level forces such as technology, social trends, and finance
line up just right to drive share prices to unprecedented highs.
It's what happened with tech stocks in the 1990s and emerging
markets last decade, and now something similar appears to be
underway in natural gas.
Before looking at individual names, let's consider some of the
elements driving this boom.
Output: More natural gas is being produced than ever
After stagnating at 23 trillion to 24 trillion cubic feet (TCF)
between 1970 and 2006, U.S. production numbers are pushing into
new record levels. Production continued growing throughout the
financial crisis and climbed another 3.22 percent to 26.85 TCF
from 2009 to 2010. Last year, in fact, every month except
January, February, and July set new records.
Advances: Secular bull markets often involve new
Advances in seismic imaging have significantly increased the
efficiency of operations, and when they do break the surface they
can extract more energy thanks to techniques such as coiled
tubing and slimhole drilling. They have also expanded the use of
a method known as "fracturing," where water or CO2 is used to
break rock so that gas can flow more freely.
This has been key to increasing production to so-called shale
properties, which hold vast amounts of gas that was previously
unrecoverable. Perhaps even more important have been advances in
transportation using liquefied natural gas (
), which allows the fuel to be shipped on tankers. (See our
coverage of Cheniere Energy for more on that trend.)
Customers: Quietly, the U.S. is becoming a major gas
Everyone talks about how the growth in China and India are
driving gains in agriculture. However, while our dependence on
Canadian oil has roughly doubled in the last decade, our northern
friends have increased their imports of U.S. natural gas tenfold
to 732 billion cubic feet during the same period while U.S.
imports from Canada have stagnated. Shipments to Mexico have
tripled as well.
Something also seems to be happening with Europe. Energy
Department data shows that the United Kingdom imported natural
gas from the United States for the first time ever in November
and then increased volume more than 80 percent the following
month. A cursory survey of news articles also indicates that the
country is increasing its reliance on LNG.
Domestic use, on the other hand, has barely budged over the last
decade. Industrial consumption has fallen steadily, offset by
increased electrical generation.
Politics: Mideast unrest has put energy policy back in
It's a bigger problem for Europe than the United States because
the continent relies more on oil from North Africa and Arabia.
But don't forget about Russia, which has also occasionally
threatened to cut off Europe's gas supply. Given our abundance of
gas, plus our political stability, we could be in the early
stages of a transatlantic export boom.
Then there is green energy. While U.S. vehicular natural gas use
is confined mostly to buses, it has enormous potential. It's
produced domestically (no money going to regimes that hate us)
and will appeal to voters and politicians of all political
Prices: The potential for rate hikes is the elephant in
Despite the recent gains in oil, natural-gas prices have remained
around $4 per thousand cubic feet. At the same time, speculators
have grown increasingly bearish, driving short interest to the
highest level in more than two years.
"If crude continues bananas to the upside, some of the big hands
will look at that and try to run natural [gas]," said Addison
Armstrong, director of market research for Tradition Energy. "I
think the risk/reward on that trade is probably to the upside."
Companies: Which stocks look good?
Names such as El Paso and Williams have been the leaders so far,
rallying more than 50 percent in the last six months. This is an
area where everyone needs to find ways to do their own research
because understanding natural-resource companies can be extremely
If you understand geology, or have family in the industry, take
advantage of that knowledge. Most of use will need to take our
cues from the options action and the charts.
Stocks such as Chesapeake Energy, Range Resources, Noble Energy,
and National Fuel Gas have been on the radar so far. Get to know
them and look for good entry points. (CHK and RRC, for instance,
are worth watching to see if they hold support after recent
drops.) Then there is always takeover potential if big oil names
want to grow in the sector.
The main message of this article is that we're in the midst of a
long-term secular bull market.
The trend is likely far from over. Pullbacks are to be bought.
I am long RRC.
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