Natural Gas

[winston]

Bull market in Natural Gas

First, we think natural gas bottomed last year and will continue a new bull market this year. Relative to oil, we think natural gas is still cheap (though not as cheap as last year, when we called the bottom).

And while vast new quantities of natural gas are coming on line, power companies are switching a large number of coal-fired power plants to natural gas. As demand for electricity rebounds this year, demand for natural gas will grow faster than expected – fast enough to push prices back to more than $10 per thousand cubic feet (mcf). Powering demand for electricity will be a surprising rebound in global economic growth.

Source: S&A Digest

[winston]

My Favorite Commodity to Buy Right Now By Porter Stansberry

In yesterday's DailyWealth, I outlined how rising interest rates will depress the stock market's P/E multiple

... which will create a giant headwind for stock market investors.

You can protect yourself from this headwind by avoiding high-priced growth stocks. A popular growth stock trading for a P/E of 40 can get cut in half in a matter of months in this kind of environment. For instance, Amazon currently trades for 75 times earnings. Surgical device maker Intuitive Surgical trades for 58 times earnings. Danger ahead.

But what sectors do well when inflation is rising... when the government bond market is correcting... and when earnings multiples in the stock market contract?

Two things in particular: energy and precious metals.

In December 2008, just after witnessing the financial crisis and the government bailout of AIG, the investment banks, and Fannie/Freddie, I knew it was only a matter of time before we entered a market like we have today – one with rising inflation and interest rates. My first – and best advice – was to buy gold bullion.

I also noted how cheap gold stocks were at the time, and recommended buying GDX – the ETF of the unhedged gold producer companies. We bought at $28 per share. It was recently trading at more than $50 per share. I expect it to go much higher, but clearly, our best chance to buy gold stocks is long gone.

On the other hand, various market factors have pushed natural gas down to record low levels – offering us an attractive way to buy a great inflation hedge. It's worth considering what the world's best-managed oil company – ExxonMobil – is doing in this sector right now...

In mid-December of last year, ExxonMobil announced it would buy the largest U.S. natural gas producer, XTO Energy, in an all-stock transaction valued at $41 billion. This will be Exxon's biggest takeover since acquiring Mobil in 1999. The XTO purchase provides Exxon with reserves equivalent to 13.9 trillion cubic feet of gas, or 2.3 billion barrels of oil.

From 2005 to 2008, when most of the other Big Oil companies went on a buying spree, Exxon was selling assets and adding to its massive cash hoard. Just as easy lending led to the real estate crash, high energy prices (especially in natural gas) led oil companies to expand recklessly. They started investing in alternative-energy resources like shale, which cost more to produce.

In December 2005, ConocoPhillips paid $35.6 billion for the independent oil and gas company Burlington Resources. In January 2006, Royal Dutch Shell bought 70,000 acres of the Fayetteville shale property in Arkansas. BP paid nearly $2 billion for 90,000 acres of Chesapeake Energy's Woodford property in July 2008 – right near the top. BP paid another $1.9 billion for a 25% stake in Fayetteville just after the Woodford purchase.

All of these purchases took place while gas was trading near all-time highs. When the economy turned down in mid-2008, natural gas plunged from around $14 per thousand cubic feet (mcf) to less than $3. Big Oil's gas purchases got crushed. That's when Exxon made its move.

The reason Exxon is buying gas is simple... Oil is expensive to find. It's more cost-effective to buy cheap natural gas reserves. Gas has more than doubled from its 2009 low, but it's still down 70% from its 2005 highs.

The chart below shows the 15-year historic ratio of oil to natural gas. When the line peaks, gas is cheap relative to oil. When the line bottoms out, gas is expensive compared to oil. When gas prices bottomed in September 2009, the ratio jumped to more than 24. The current ratio is around 14. While we're not catching the exact bottom, we do have the opportunity to buy gas at one of its cheapest points relative to oil in history.

S&P 500: The stock market has gone to sleep

You can see that natural gas is cheap right now. And three main drivers will increase demand...

1. Domestically, power companies are switching a large number of coal-fired power plants to natural gas. As electricity demand rebounds this year, natural gas demand will rebound faster than expected.

2. In China, coal comprises 70% of the primary energy. Natural gas only makes up 3% of its primary energy. Eventually, out of health concerns for its citizens, China will depend more heavily on the much cleaner alternative – natural gas.

3. Finally, my friend Rick Rule, the hugely successful resource investor, points out that many national oil companies, like Venezuela's and Mexico's, have severely underinvested in their domestic oil production for years. As a result, they will suffer drastic production declines. Unless Iraq steps up its oil production in the next five years, Rick says we'll see "a catastrophic shrinkage in crude export availability." Natural gas can solve that problem, as well.

I predict these three macro factors will push natural gas to more than $10 per mcf this year. Natural gas is under $6 per mcf right now. It's time to be bullish on natural gas.

Source: Daily Wealth

[winston]

Contrarian Play #3: Stepping on the (Natural) Gas

"Is Natural Gas Down for the Count?"

Headlines like that dominated the newswires a little over a year ago. Some pundits even called for the price to drop to $1 per MMBtu, due to a supply glut.

Yet that's precisely when I told subscribers to my VIP advisory, The Contrarian Strategist, that, "the cure for low prices will simply be, well, low prices" - and positioned them to profit accordingly.

Sure enough, natural gas prices have rebounded. And what a difference a year makes. I'm now seeing headlines like: "Natural Gas Stocks Could Have a Banner Year in 2010," pop up everywhere.

Despite the increasing attention, I still think this contrarian trade has legs - especially with much of America enduring a brutal cold spell. Heck, snow is even falling in the southeast. And one Miami man died from hypothermia.

The longer this lasts - or the more frequently it occurs - the greater the chance that the natural gas supply glut will disappear and prices will rise. The low temperatures could also stymie or shut off production in Texas, Louisiana and Oklahoma.

Tack on natural gas's emerging role as a "bridge fuel" to a greener and cleaner world, and many producers could enjoy a banner year, bringing their companies' shares along for the ride.

If you want broad exposure, consider the First Trust Revere Natural Gas ETF (NYSE: FCG). It invests equal amounts in publicly traded U.S. companies that derive a minimum of 50% of their revenues from natural gas.

The fund uses a common-sense approach to make the selections. It scores each stock based on valuation (price-to-earnings and price-to-book ratios), profitability (return-on-equity) and correlation to natural gas prices. Only the top 30 make the cut. It rebalances the portfolio each quarter and has a modest expense ratio of 0.6%. But don't delay.


Source: Investment U

[winston]

CONTRARIAN INVESTORS NEED TO READ THIS

Energy investors shouldn't just focus on oil sands right now. As the chart below shows, its cousin natural gas is "supercheap" these days.

Longtime DailyWealth readers know we encourage folks to view the world through several different "lenses,"
one being the price of gold. By using gold as a "gauge" to value various assets like land, stocks, currencies
and other commodities, you can filter out the declining value of paper currencies. It's no magic pill for making great investments, but it can give you a great "real money" guide for buying cheap assets.

Count natural gas in the "cheap asset" category right now. The chart below displays the past 10 years of natural gas trading in terms of gold. As you can see, natural gas fluctuated around the same value versus gold from 2002-2008. But in 2008, lots of new natural gas supplies came online, while gold soared in value. This "natural gas down, gold up" situation has left the clean fuel near historic levels of cheapness.

This is no call for a big rally in natural gas... We're simply pointing out that natural gas has been clobbered in the past year. If you're a contrarian, you're interested in natural gas...

Source: Daily Wealth

[winston]

Demand for this commodity is guaranteed to surge By Porter Stansberry & Sean Goldsmith, S&A Digest:

Cambridge Energy Research Associates is currently holding its annual conference in Houston. The conference, which hosts the biggest energy players in the world, is split into three days of discussion: oil day, gas day, and power day. Yesterday was oil day. But according to the update below (courtesy of John Kingston at Platt's), all anybody could talk about was gas:

ConocoPhillips CEO James Mulva gave a lunch keynote in which he referred to the US' growing reserves of natural gas as "The Gift." (It was sort of a play on the fact that Daniel Yergin, chairman of CERA, is the author of the oil industry classic history, "The Prize.")

Andy Inglis, chief executive of exploration and production for BP, also talked about shale gas several times during his presentation as part of the Oil Plenary. A panel on US Energy Policy also kept coming back to the shale gas issue.

The evening's dinner speaker, Eni CEO Paolo Scaroni, said in the first five minutes of his address, "Natural gas is going to be an increasing part of our energy future... the world is awash in gas."

The CERA meeting is otherwise just way too big and covers too many topics for it to be summed up with a sort-of "theme of the day." But the repeated "intrusion" of gas into oil day made this year's meeting an exception.

... Tom Walters, a top executive at ExxonMobil, explained his company's bullish views on gas (courtesy of Rig Zone):

Walters joined a group of industry leaders to address a global gas plenary on "The Role of Natural Gas in the Future Energy Mix." He noted that despite the effects of the recent economic downturn, the long-term outlook for natural gas is positive. "We expect global energy demand to increase nearly 30 percent in the next 20 years. By 2030, global gas demand will be around 140 billion cubic feet per day higher than 2009," he said.

The major driver of this demand is power generation, which will account for more than half of the gas demand growth, Walters said. He also emphasized the environmental benefits of natural gas as a source of power generation.

"Natural gas is a cleaner-burning source of fuel and power generation that over the next 20 years will continue to form an increasingly important role in the global energy mix. This can be attributed to its advantages of lower carbon emissions and greater flexibility into power generation."

When the world's largest energy companies say natural gas is the world's future energy source, it's best to listen. These companies are the market. Plus, the world needs a cheap energy source cleaner than coal – especially in China. While gas is up from its 2009 lows, it's still trading at one of its cheapest points in over five years.

[millionairemind]

Those on the LONG side might want to read this.

Natural gas
An unconventional glut
Newly economic, widely distributed sources are shifting the balance of power in the world’s gas markets

Mar 11th 2010 | HOUSTON | From The Economist print edition
http://www.economist.com/business-finan ... d=15661889

[Aspellian]

Yes. Shale Gas is now only beginning but its impact could be huge. many N.American ang-mohs are now trying to get into Europe/China to do explorations. New technologies are really increasing the gas reserves by leaps and bounds. US from net importer may even become exporter. Canada will be affected as its main gas export market is USA.

Russia are pushing back its LNG plans on its east coast. If Europe also has significant shale gas, then their dependence on Gazprom will be reduce, which means Russia's GDP will be affected. There could be a real shift in balance of power.

[Aspellian]

UBS cuts targets on weak gas outlook
UBS cut its price targets on shares of 11 drillers and oil service companies, including Transocean and Schlumberger, citing potentially weaker natural gas prices.

News wires 18 March 2010 13:45 GMT

"We believe there is a growing risk of softening gas prices (below $4.00 per thousand cubic feet of natural gas equivalent and into the $3.00's) later this year and consequently a flat to declining gas rig count," Reuters quoted the brokerage as saying in a note to clients.

"Under this scenario we believe there is clear downside risk to the oil service sector of 15% to 25% in the second half of the year."

UBS said while its near- to medium-term stance was "increasingly cautious," its long-term stance was positive, driven by oil, international markets and deepwater.

The brokerage currently expects gas prices of $6.25 per Mcf for 2010.

US April natural gas futures ended lower yesterday for a fifth straight day, with mild US weather, a sluggish economy and concerns about growing supplies again driving the nearby contract to a four-month spot continuation chart low.

UBS said Transocean and Schlumberger would be the most insulated in case of a pull-back in prices in the second half of 2010. Patterson-UTI Energy, Nabors Industries, Helmerich & Payne and Seahawk Drilling would be among the most affected, it added.

[winston]

THIS ENERGY SOURCE IS GETTING CHEAP AGAIN

With stocks and bonds up more than 50% in the past year, we find ourselves looking harder and harder for contrarians ideas... like utility stocks, which we presented last week.

We also find ourselves coming back to the "contrarian's commodity," natural gas. As our colleague Matt Badiali just outlined in Growth Stock Wire, the "clean cousin" of oil is nearing extreme levels of cheapness.

As Matt discusses, a large supply of natural gas has flooded the market in the past few years. This supply surge has altered an old ratio between oil and natural gas. Since these commodities are both used as fuel, they tend to trade in an energy-equivalent ratio.

During the late 1990s to the early 2000s, an oil-to-gas ratio of 12:1 or 14:1 meant natural gas was cheap. But "post supply surge," we need to see an oil-to-gas ratio of 20:1 or 24:1 to say gas is cheap relative to oil. This ratio reached a "super cheap natural gas" reading of 24:1 in the fall of last year. This extreme reading kicked off a more than 100% rally in natural gas... which brought this ratio back to a more normal 14:1.

But in the past few months, natural gas has tumbled more than 30%. This decline has sent the oil-to-gas ratio back into the 20s... near a "super cheap natural gas" level.


Source: Daily Wealth

[winston]

Huge Bets Against It… Me? I'm Buying! By Dr. Steve Sjuggerud
Thursday, April 29, 2010

I've made the most money in my investment career doing one simple thing: Buying what's cheap and hated.

The cheaper, and the more hated, the better the returns.

The problem today is, nothing is cheap anymore, and nothing is out of favor. Heck, many things – from stocks around the world to commodities like oil – have doubled since last March.

But wait! There is one asset out there that is incredibly hated…

It is so hated… there's never been a moment in history where the bets against this asset have been as lopsided as they are right now.

And it is so cheap… you have to go back many years to find a time when the price of this asset was this cheap.

The great part is, looking ahead, this investment actually has nearly unlimited demand. It is an incredibly useful asset.

And unlike many investments, this asset can't go to zero… It has a built-in price "floor." When it gets cheap, people stop using other assets and switch to this one.

The asset I'm talking about is natural gas…

While the price of oil (and everything else) has soared, the price of natural gas has fallen more than 70%… It peaked in the summer of 2008, over $13, and it now stands around $4. Why is it so cheap and hated now?

In short, a new technology changed the game entirely…

Just a few years ago, the outlook for U.S. natural gas production was bleak. Supplies were dwindling. And with limited supply, prices were rising.

Then, new technologies (including horizontal drilling) came along, allowing us to extract gas we couldn't really get to before. And just like that, the potential supply of natural gas in the U.S. is all-of-a-sudden enormous.

It's Economics 101. When the supply outpaces demand, prices fall. It is obvious – so obvious, in fact, the crowd is in on the trade…

Just as investors now believe stocks are a "sure thing" to go higher – AFTER they've doubled, investors now believe natural gas is a sure thing to go down – AFTER it's fallen over 70%.

Specifically, right now, there are more bets against natural gas by large speculators than there have ever been in history.

The old rule about the large speculators goes something like this… They're "wrong at extremes, and right in between." Right now, we're at the greatest extreme, ever. Chances are, they're wrong.

The thing is, all these bets against natural gas have to be reversed… That means we must see billions of dollars worth of "buy" orders in natural gas futures, because that's the way these traders close out their trades. So the price of natural gas could rise dramatically – and possibly soar – just in the normal course of all these large speculators entering billions of dollars worth of "buy" orders to close out their bets against natural gas.

I love it.

Now think about this… Natural gas has a permanent price "floor." When it gets particularly cheap, energy companies want to substitute natural gas for what they're using – whether it's oil of some kind, or coal, or whatever. According to my geologist-friend Matt Badiali, we're just below that price floor. Power plants are already switching over to natural gas.

Our energy use in America changes at a very slow pace. But the trend for "dirty" coal is inexorably down, and the trend for natural gas is the opposite. The new technologies for finding and getting to natural gas in America virtually ensure its future use.

Energy-stock analyst Kurt Wulff said it best in one of his reports at www.mcdep.com

: "While the natural gas market may have too much supply and too little demand in the short term, there is practically unlimited demand to replace coal in the long term."

The price of natural gas has fallen and investors are fearful. Meanwhile, it's close to multiyear lows in price. So it's CHEAP and HATED.

The world's best investor, Warren Buffett, says, "Be fearful when others are greedy, and greedy when others are fearful." Investors are greedy for every investment these days… except natural gas.

It's time to be like Warren Buffett… It's time to step in when others are fearful.

Sell some of the stuff in your portfolio that's doubled. Take that money and get yourself some exposure to natural gas.


Source: Daily Wealth