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speedybure (< 20)

Friends Don't Let Friends.......BUY NATURAL GAS!



April 15, 2009 – Comments (3) | RELATED TICKERS: XTO.DL , CHK , OIH

Don't get me wrong, I love the future for natural gas. But the future is at least 2 years from now, possibly longer. Don't expect a new wave of 5 and 10 bagger Outperformers such as XTO and CHK anytime soon (speaking in general terms, there are always a few exceptions). The reasoning behind this thinking lies in elementary supply and demand dynamics.  




1) The huge inventory and new shale discoveries over the last decade has led to a glut of natural gas. The artifical boom from 2003-2007 was also a time of enormous capital investment for natural gas discoveries, in particular when everyone decided to "go green" coupled with the cost of oil soaring to $150/barrel. I also think the highs previously seen in NG (my recollection is $15) acted as a catalyst for entrepreneurs to invest more than would have been otherwise. As opposed to oil, I think the high 12-15$ for NG was a bubble.



 2) I know T. Boone pickens launched an enormous campaign promoting this source of energy as a substiute to oil. I agree that cars and many other things should and will eventually rely on natural gas because of the cost savings and the go green mentality. I also expect the government to have some mandates, as they always feel the need to interfere with market. All that being said, I'm bullish in the long term for NG, but rather bearish in the short term. This bearish mentality is simply due to opportunity cost with investing in oil, where the supply dyanamics are exactly the opposite (a decreasing supply and increasing demand). When demand does come back to the market, it will also take a period of time in order to reduce the glut. 


 3)China has decided to go nuclear illustrated with the deal in place with BHP billiton supplying a rather large amount of uranium. In oher words china will rely on nuclear energy, thus reducing some demand they would have had for natural gas. Parts of Europe, France in particular is already running on nuclear energy. Though this may not have a significant impact on demand, it's just another reason for the bullish argument. I also suspect Russian and Brazil will rely on oil because of nationalization/large supply. 

 In Short, it is my opinion that buying natural gas or pure natural gas equities will not maximize anyones potential returns as opossed to oil or oil equities. There will come a point where abnormal returns will be seen in natural gas and equities, but my optimistic estimation is about 2 years which i think is  the shortest period of time that we can increase our reliance on NG in addition to reducing the current glut. I may be wrong but going with oil equities or oil as gas equities, will outperfom the pure natural gas plays to a significant degree.      

3 Comments – Post Your Own

#1) On April 15, 2009 at 6:21 PM, chk999 (99.96) wrote:

The oversupply may not last all that long. The shale plays have a very rapid dropoff curve. You get most of the gas in the first couple of years. Since drilling has fallen off a cliff, we may end up with a supply shortage much faster than if the drilling was in sandstone with its much slower dropoff.

Chris - long CHK and ATPG

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#2) On April 15, 2009 at 6:27 PM, speedybure (< 20) wrote:

I agree but to a point. I know some canadian companies have recently discovered some natural gas shales. I am a bull, but i prefer oil to NG or companies which do both. 

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#3) On April 15, 2009 at 6:54 PM, XMFSinchiruna (26.53) wrote:

I have been scaling back my NG exposure as well lately... reluctantly. I still love the long-term story as global tensions are bound to hear up in competition for oil reserves.

Some of this depends upon China, too. If China recovers economic activity to the point where they're importing large quantities of coal and pushing prices back up, then we could see NG increasing in scope relative to electric generation. As I reported this afternoon, China is expected to become a net importer of coal in 2009.

I agree that oil will bounce back faster than NG, though, which is the rationale for my reducing exposure lately. Some of those names were hard to part with... :)

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