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Natural Gas Is a Sucker’s Bet: Stephen Schork



June 22, 2011 – Comments (7) | RELATED TICKERS: EPD , SEMG , NESC

This sensational headline from Yahoo! Finance got me thinking about where the price of natural gas is headed and whether it will indeed eventually be used more in the future.

Natural Gas Is a Sucker’s Bet: Stephen Schork

Having seen him on CNBC a number of times, I think that Schork is a relatively smart, well-spoken individual.  Having said that, this doesn't prevent him from being wrong.  He was completely wrong a number of times during oil's historic run to $147/barrel.

I think that a phrase that I often say applies here, "The truth lies somewhere in the middle."  I don't think that the massive bounce in natural gas prices that many of the bulls are looking for is going to materialize any time soon.  The market is just different today than it was during the commodities surge to $13/MMBtu during 2008.  Back then, the U.S. was much more reliant upon the Gulf of Mexico for its natural gas.  Any hurricane that threatened to disrupt Gulf production sent the price of gas surging.  Furthermore, the economy was humming along at a blistering pace several years ago spurring strong demand for the commodity.

Flash forward to today, the aftermath of the Great Recession, and the demand for natural gas is not nearly as robust.  More importantly, new drilling technology, such as fracing, has opened up new sources for natural gas that didn't exist a few short years ago.  Despite the current low price of natural gas, around 4.30/MMBtu, companies are still drilling for gas like crazy. 

That is why natural gas prices are so low right now.  I personally don't see anything that will dramatically cause this trend to change in the near future either.  Anyone who thinks that the U.S. will in any significant way begin to use natural gas as a transportation fuel is absolutely dreaming.  As someone who works in the auto industry, it would absolutely blow my mind if this were to happen.  Yes, it is being used in a minimal way right now and it will continue to be used from time to time in the future, but in my opinion the use of plug-in electric vehicles is a much more likely transition than the use of natural gas.  The Nissan Leaf and Chevrolet Volt, along with some Teslas and a few other odds and ends if you want to count them, are already being sold.  If they are well received by the public, I expect the use of plug-in vehicles to continue to rise, slowly but steadily.  It will take a while before this happens, but the possibility of plug-in vehicles having a meaningful impact upon electricity consumption some day is very real.

Plug-ins aren't where the real demand for natural gas is going to come from, so you'll have to excuse my tangent.  The real demand for natural gas is going to come from its use in generating electricity.  The combination of new EPA regulations and the fear of nuclear power in the aftermath of the tragic Japanese earthquakes make natural gas a logical source for new power plants.  Just this morning I came across a list of coal power plants that companies are planning to take off-line in the near future.  Take a look:

OWNER        UNIT                  SIZE   STATE  DATE TO SHUT
Exelon       Cromby Units 1,2      345    PA     May 31, 2011
Exelon       Eddystone Units 1,2   588    PA     May 31, 2011
AEP          Phillip Sporn         450    WV     2011
TVA          Shawnee Unit 10       124    KY     2011      
Duke         Cliffside 1-4         198    NC     2011
Duke         Buck 3 & 4            113    NC     2011
AES          Greenidge             156    NY     c2011
AES          Westover              128    NY     c2011
TVA          Widows Creek 1-2      282    AL     Late 2011 
TVA          John Sevier Unit 1,2  352    TN     2012 
Duke         Edwardsport           160    IN     2012
Duke         Dan River 1-3         276    NC     2012
Progress     H.F. Lee              397    NC     2013      
Black Hills  W.N. Clark             42    CO     By 2013   
Progress     Weatherspoon          172    NC     2013-2017 
Progress     Sutton                600    NC     2014      
Duke         WS Lee                370    SC     2014
Dominion     Salem Harbor          738    MA     2014   
AEP          Glen Lyn              335    VA     Dec 31, 2014
AEP          Kammer                630    WV     Dec 31, 2014
AEP          Kanawha River         400    WV     Dec 31, 2014
AEP          Phillip Sporn         600    WV     Dec 31, 2014
AEP          Picway Plant          100    OH     Dec 31, 2014
AEP          Big Sandy 1,2       1,078    KY     Dec 31, 2014
AEP          Clinch River 3        235    VA     Dec 31, 2014
AEP          Conesville 3          165    OH     Dec 31, 2014
AEP          Muskingum River 1-4   840    OH     Dec 31, 2014
AEP          Tanners Creek 1-3     495    IN     Dec 31, 2014
AEP          Welsh 2               528    TX     Dec 31, 2014
Dominion     North Branch           74    VA     Late 2015 
Duke         Riverbend 4-7         454    NC     2015
Duke         Buck 5-6              256    NC     2015
TVA          Widows Creek 3-6      564    AL     Late 2015
TVA          Johnsonville 1-6      794    TN     Late 2015 
TVA          Johnsonville 7-10     692    TN     Late 2017 
Dominion     State Line            515    IN     By mid-2014
Progress     Cape Fear             316    NC     2017      
Xcel         Cherokee 1-4        1,069    CO     By 2017   
Xcel         Arapahoe 3,4          156    CO     By 2017   
Xcel         Valmont               186    CO     By 2017   
CPS Energy   Deely                 871    TX     2018      
PGE          Boardman              585    OR     2020      
Centralia    TransAlta             688    WA     2020
Centralia    TransAtla             688    WA     2025
APS          Four Corners 1-3      560    NM     ---      

Yes, I realize that many of these dates are far in the future, but there's no doubt in my mind that the trend of switching from coal towards natural gas for use in the generation of electricity is happening and will continue to pick up steam.  According to a recent article by Reuters, "Stricter regulations being formulated by the U.S. Environmental Protection Agency to reduce air and water pollution as well as to control the handling of coal waste are expected to force the retirement of between 30,000 and 70,000 MW of coal generation across the country, according to several industry studies."

To say that natural gas is a "sucker's bet" is a joke and nothing more than a cheap way to grab headlines and publicity for yourself.  The fact that I am talking about it proves that it worked.  Having said that, I don't expect nat gas prices to rise dramatically in the future. 

The million dollar question is can one profit from this trend of increased natural gas volumes with low prices.  The answer is to buy the companies that support the industry, like pipelines including my personal holdings of Enterprise Products Partners (EPD) and SemGroup (SEMG), as well as my investment in a company that helps clean provide and clean up the massive amounts of water that is used in fracing, Heckmann Corp. (HEK).

I'd love to hear others' thoughts on where the price of natural gas is headed.


7 Comments – Post Your Own

#1) On June 22, 2011 at 5:27 PM, awallejr (28.16) wrote:

I remember back in 2008 when Cramer was touting nat gas when it was in the $13 dollar range and then doing all these specials on the Marcellus shale plays.  My thinking was wouldn't this abundant supply actually put downward pressure on the price?  To some extent, as well as a serious recession, I am sure it has.

The real play, ironically, might be actually as an export play where Europe and Japan pay 2-3 times the price it sells for here.

Personally I thought the President missed his chance. He went the electric car route. Instead of wasting $700 billlion on a questionable stimulus plan, what could have been done was a "manhattan project" with natural gas replacing oil as the main automotive fuel. You would have created literally millions of jobs engaged in the construction end with building out the infrastructure and the money would be staying here in the US and not to the Middle East.

I am not an electric car fan.  First I don't know what the savings would be between a gasoline fill-up with comparable battery recharges incurred when traveling the same distances.  Second, how long will those batteries last.  Third how long do these recharges take. 

I do think that solar is the true endgame, however, but we are a long way off I suspect.


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#2) On June 22, 2011 at 5:31 PM, TDRH (96.84) wrote:

For relative stability and dividend distribution I like the natural gas transmission/pipeline companies.

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#3) On June 22, 2011 at 7:31 PM, ChrisGraley (28.61) wrote:

I mentioned the very same thing in TMFBabo's post here.

The pipline play is a very good angle.

I would imagine that any movement toward increased Gas usage is going to be met by suppliers trying to ramp up production as fast as they can to beat their competition to market. I can't see a rise in Nat Gas prices until supply can't keep up with demand. Everyone will therefore try to meet demand as fast as they can.

The makers of production equipment should do equally well if that is the case. 

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#4) On June 23, 2011 at 12:03 PM, XMFConnor (96.89) wrote:

I agree about the Pipelines (also long SEMG).

I think it comes down to the fact that there is without a doubt going to be much much greater supply of natural gas in the future (new drilling techniques, exploration, etc). However, the future demand is very uncertain. It's tough to make a current bet on rising nat. gas when there are so many factors such as policy implications that affect that future demand.

While it may not be a sucker's bet, it does seem like a bet of faith to me. I personally think Natural Gas would be great for our country to use much more heavily, but I definitely agree that things such as pipelines are a much smarter way to play it-- at least in the near term.

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#5) On June 23, 2011 at 12:09 PM, ag77840 (23.45) wrote:

Any opinion/thoughts on Cheniere LNG?


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#6) On June 23, 2011 at 4:34 PM, outoffocus (23.91) wrote:

Thank you Deej for the clarification.  I was a little concerned when I read the title because I initially started investing in nat gas based on your recommendation in 2008 when it was dirt cheap.  While my returns havent been momentous (quite volitile though) I'm stil sitting on a modest gain in the sector.  I agree that at some point we are going to have to incorporate natural gas more into our daily energy needs because lets face it, $6/gallon gas would just devaste our already fragile economy.

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#7) On June 23, 2011 at 5:19 PM, CMFStan8331 (97.49) wrote:

I would agree with Schork that NG is a sucker's bet, if one's expectation is to get rich quick.  It's likely that production will be able to increase roughly alongside demand for the foreseeable future, even if demand increases dramatically.  But given that NG is plentiful within the continental U.S. and significantly cleaner than coal or oil, I also believe it's a virtual certainty that demand will increase. 

 I think it makes great sense to invest in gas companies that  profitable right now.  They could do very well with a modest rise in NG prices and the odds of NG prices falling through the floor for an extended period of time seem quite low, unless we dive back into a deep recession or depression.  If that happens, there won't be many stocks doing well in any industry.

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