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Natural Gas Stinks



January 25, 2009 – Comments (6) | RELATED TICKERS: PDS , CHK

Natural gas absolutely stinks, both literally after the utilities add that stuff to it, and figuratively right now.  Barron's published a very bearish article in its "Commodities Corner" in this week's issue. As someone who has followed nat gas fairly closely for a couple of years now I have to agree with the article's assertions.

The price of natural gas in the United States typically rallies when winter arrives. If we experience unusually cold weather, like many parts of the country have experienced lately (including here in the Northeast, grumble, grumble) natural gas prices historically have really exploded.

Unfortunately, that has not been the case this season. When gas prices exploded into the double digits last year, it caused a tremendous boom in exploration and production for it here in the U.S. While domestic sources of oil may be becoming scarce, we still are awash in easy to access natural gas. When drilling activity accelerates, prices come down.

The chances for a major rally in nat gas prices in the near future look low. Nat gas settled at only $4.518 per BTU on Friday. It was down nearly 6% on the week, and a shocking 67% below the peak that it hit earlier in 2008.

While the cold weather and the need for natural gas as a heat source has a major impact upon natural gas prices, industrial production is a factor as well. Approximately one third of the gas consumed in the United States is industrial demand. Large plant closures and layoffs by large companies like Dow Chemical (DOW) and Alcoa (AA) lately are a sign that industrial usage of nat gas will likely be soft for a while to come.

Long term,the new administration's tilt towards clean energy might be a plus for natural gas, it emits less greenhouse gasses than coal does.  However, with industrial production slowing, inventory levels high, and slowing consumption from things like oil sands and ethanol plants (both of which use a ton of nat gas), chances are that low prices will be here to stay for a while.  Basic economics dictates that prices will remain under pressure until this excess supply is worked off...which could take a while.

Many natural gas drillers have responded by idling their rigs and slashing their production budgets. As of Friday, the number of rigs drilling for gas in the Unites States was down over 25% from its September peak, according to rig count data published by Baker Hughes. Production cuts are bullish for prices, but these moves will take time to have an impact. Chances are that we will have to see many more rigs idled before prices begin to rebound, especially with the end of winter rapidly approaching. This is bad news for drillers, like Precision (PDS) and Chesapeake (CHK).

No position in any driller

6 Comments – Post Your Own

#1) On January 25, 2009 at 11:51 AM, chk999 (99.96) wrote:

Now might be a good time to start buying in the ground reserves if you can get them for cheap. This low price won't last indefinitely (especially if the Pickens plan gets any traction) and buying reserves cheap (and companies with little debt) could be a good play.

Chris - long nat gas and looking to get longer

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#2) On January 25, 2009 at 1:11 PM, ajm101 (< 20) wrote:

chk999 - I think a collection of CHK, SD, MMR, XTO, and DVN is a decent contrarian bet right now.  Hydrocarbons didn't get easier to find, and the US dollar would be following the pound if it weren't for its reserve status.  Since it's harder to store nat. gas than oil it's more subject to market fluctuations.

I'm with Deej on PDS and most of the land drillers.

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#3) On January 25, 2009 at 1:33 PM, awallejr (34.04) wrote:

This is why I like EVEP and LINE.  They are paying a great yield and they have heged their product for several years out,

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#4) On January 25, 2009 at 8:16 PM, Imperial1964 (94.02) wrote:

I'll likely buy back into natural gas at some point in 2009 for the long-term reasons you listed.  However, I'm waiting for better prices, for the short-term reasons you listed.

Sold UNT in August.  Would've sold just after the peak in gas prices in July, but I was holding out for the long-term capital gains tax rate.

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#5) On January 25, 2009 at 10:44 PM, nuf2bdangrus (< 20) wrote:

Buy when nobody wants it and sit on it.  Demon Dough taught me  to "cash my net wide and let my picks maronate".  I get it.


I've been buying small quantities of UNG, DVN, and have limit orders in for more.   Energy does not have any political risk right now priced in.,..and furtehrmore, I believe a good long term investing strategy would be to buy American and Canadian E&P as individuals or in ETF's.

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#6) On January 26, 2009 at 6:16 AM, TMFDeej (97.65) wrote:

Thanks for the comments everyone.  I agree that the time to buy is when things are cheap, not when everyone wants them.  Unfortunately, I'm not sure if the prices that natural gas drillers are currently trading at adequately discount considering the possibility that low nat gas prices could outlast any hedges that they have on the books. 

From the looks of it, it could be 2010 at least before we see any improvement in nat gas prices.  Once these hedges come off, the numbers for these companies are going to look pretty bad.

I have always preferred companies that have actual natural gas assets aka producers to drillers.  Producers are more likely to pay dividends as well.


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