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Natural Gas

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January 07, 2011 – Comments (16) | RELATED TICKERS: CMZPD.DL

So many people on CAPS seem bullish on natural gas.  I would like to hear why.  The price is crap, we have so much of it, theres no tax benefit for using it, it would take a while to convert gas stations, oil isnt TOO expensive yet, oil isn't going away anytime soon, more people are learning the dangers of fracking

A bullish sign I have seen recently is the ratio of oil price to natural gas price is at around 22, and the last time this happened, NG doubled.

I would like to hear 1) A bullish case for NG 2) A reason why I should not sell my CMZPF position at a loss

16 Comments – Post Your Own

#1) On January 07, 2011 at 7:13 PM, TMFBabo (100.00) wrote:

I'm preparing a bull case on gas, but I'm not done (it's longer and requires more research than some quick blog post). I've also been sidetracked by other things, so it may be a while yet before I post it.

I will say that Compton is an extremely leveraged way to play natural gas.  I can't think of another stock that would beat Compton if natural gas were to go a LOT higher ($8+).  However, the only catalyst for Compton is higher natural gas - there are no good developmental stories here (no Niobrara, Eagle Ford, or other attractive new acreage).  

I don't like how Compton would perform in a sub $5 gas environment due to its gas fields not being the lowest cost (Marcellus and other acreage is much better).

For the time being, I believe Compton is developing its Niton acreage since it's liquids rich.  The other 2 fields seem to only have gas.  Compton is 85/15 gas/oil, so this oil in the Niton will not last forever.

If gas can stay this low forever, Compton will just be burning down its reserves for a while without replacing them.  Compton does have a lot of reserves compared to its market cap, but it's still something to keep in mind.

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#2) On January 07, 2011 at 8:04 PM, EnigmaDude (94.87) wrote:

Hey  TMFBabo - I eagerly await your pending writeup on this subject!  I see lots of great picks in this area like DBLE, GST, REXX, KOG, and others.  I am curious to see how you evaluate and rank some of them.

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#3) On January 07, 2011 at 8:36 PM, Pennyperson (< 20) wrote:

Rec- I'm bullish on NG as long as they play with oil too.

BUT -GST and DBLE is a no brainer.

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#4) On January 07, 2011 at 9:11 PM, SockMarket (42.28) wrote:

valy,

I think you are assuming that nat gas has to grow tremendously to do well. This isn't so. To refute you:

1) just because we know where alot of it is, doesn't mean we will produce too much. Production is an illiquid situation (sry for the bad pun) and it takes several years to bring more online. Current storage reserves are below their 5 year average so this should not makethe price fall

2) you don't need a tax benefit for the price to go up. After all, have you seen a price benefit for coal?

3) there are uses for natural gas other than cars...like heating houses, producing electricity, chemicals, fertalizers, etc. 

4) no, but oil is rising and, seeing as the world is having a hellofa time increasing production from present levels the price will probably keep going up. Oil doesn't have to dissapear for its' price to rise. Also, you know the bull case for coal; when it goes up people will convert their coal plants to natural gas.

5) production cost is around $5-6/mcf from what I have seen for many of the major companies, higher for smaller ones. The figure I have heard, albeit a few years old, is that the average production cost is just under $8/mcf. I guarantee you cannot have a situation where price

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#5) On January 07, 2011 at 9:17 PM, SockMarket (42.28) wrote:

ugh. stupid TMF system. Honestly for a group of "hard working" people they produce a miserable product. To be able to rake in the dough like they do for doing absolutely nothing...they must have the cushiest job in the world. Anyway the part of my post that got cut off was:

is greater than cost. Lowering costs by 1/3 or 1/2 is very hard in any industry, especially nat gas. So given that, and the knowledge that the demand for natural gas will probably go up (assuming the economy doesn't go somewhere in a handbasket) I think that gas is underpriced at the moment.

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#6) On January 08, 2011 at 12:22 AM, caterpillar10 wrote:

get's us off the n.african tit as we convert trucks & busses to CNG & more power plants to NG our air gets cleaner - those are the main drivers. 

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#7) On January 08, 2011 at 9:10 AM, TMFBabo (100.00) wrote:

It's not that the entire industry itself has lowered its costs - the bear arguments people often use is that new gas discoveries such as the Marcellus shale in PA is that shale gas plays such as the Marcellus (along with Eagle Ford, Barnett, Woodford, Fayetteville, etc.) are both extremely low cost and very plentiful.

Many of these have been discovered in the last 10-15 years, so people have been arguing the supply fundamentals have changed, probably for good.

I will explore that and some other things in my upcoming natural gas bull case blog...I wish I were done so I could just post it.

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#8) On January 08, 2011 at 10:02 AM, portefeuille (99.59) wrote:

the chart.



enlarge

 



enlarge

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#9) On January 08, 2011 at 11:37 AM, lemoneater (82.73) wrote:

Thanks for bringing up this topic Valyooo! I do wonder why we don't take more advantage of such an abundant domestic natural resource. Also I wonder why it is trading so low. I'm going to post a blog asking how people heat their homes. I'm thrilled that our home was converted to natural gas.

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#10) On January 08, 2011 at 4:22 PM, ajm101 (31.92) wrote:

The bull case for natural gas is that they'll start using for cars.  See this:

http://www.eia.doe.gov/aer/pecss_diagram.html

You'll note a few things. 

Almost all coal goes towards electricity.  All nuclear energy goes to electricity.  They are both much lower cost than natural gas over long timeframes, but there are limits to how much both can be used (coal because of transportation, air pollution; nuclear because of the difficulty of building new plants).  Natural gas is used in 2/3 of the remainder (probably mostly peak load), but would have to be drop substantially in price to take share from nuclear or coal (base load).

Industrial use is vague, but it amounts mostly to plastics and refining.  There is not much room for feedstock substitution there.

Transportation is almost all oil, though.  And oil, for an amount with an equivalent energy content, is currenty 3 times more expensive than natural gas.

Compressed natural gas cars already exist.  Pakistan uses them widely, and dual use (gasoline and natural gas) cars are common in Europe.  The Honda Civic GX has been available in the US for years.  It gets excellent mileage (24/30 mpg), but the downside is that CNG is a less dense fuel and it has a lower capacity fueltank and greater volume fuel tank compared to gasoline vehicles.

The one company that supplied home CNG refueling gear just went bankrupt (google 'Phil natural gas refueling'), and the company that bought the business (FSYS) had some absurd short interest.  Honda doesn't even mention the Phil on the GX web page.  I suspect that trucking around LNG or CNG like gasoline isn't practical, building out piplelines and storage for a new distribution system (CLNE) will take time and be expensive, and gas stations have garbage margins already (says PTRY and DK holder).

However - I just found this in google, so take it with a grain of salt - natural gas fuel prices at http://www.altfuelprices.com/ show CNG costing 1/2-2/3 the price of gasoline.  As CNG fueling scales up, the costs will come down to closer to the fuel costs.  Since 1 barrel oil = 28 gallons gasoline = $30 of natural gas, $3 gasoline should mean ~$1.25 GGE (gallon gasoline equivalent).  I think a bunch of people would switch at that price.

Note that $30/bbl oil is not longer possible. We get a good chunk of our import from the Athabasca bitumen deposits, and they are not economical at that price.  Oil is going to stay above 70 or production will drop.   So natural gas will rise to meet it.

This is such a big societal change that it won't happen quickly.  But according to an analyst's paper that was being mentioned last week, 40 bbcf of incremental natural gas production is going to be coming online in the next few years.  The mainland US doesn't have pipelines to natural gas export markets.  LNG commands much higher prices ($8/bbcf?) in east Asia and Europe, but there are no gasification facilities and they cost billions and take years to build.  Without a massive increase in consumption, the market will get flooded.  More leveraged and higher cost producers might go bankrupt (so not sure what to say about Compton to you).  I also expect it will be a great LT buying opportunity.

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#11) On January 08, 2011 at 4:24 PM, ajm101 (31.92) wrote:

I need an editor, apparently.

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#12) On January 08, 2011 at 5:40 PM, Pennyperson (< 20) wrote:

http://articles.moneycentral.msn.com/news/article.aspx?Feed=MW&Date=20110103&ID=12557110&Symbol=US:CHK

LNG pitch:

The Department of Energy granted Cheniere Energy which is building the first new export terminal for liquefied natural gas in the US in 40 years, the right to sell LNG all over the world. That’ll turn out to be big business for Cheniere because the US has such large nat-gas reserves and produces the commodity so cheaply.

In the same camp as SockMarket & TMFBabo on NG

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#13) On January 08, 2011 at 6:08 PM, ajm101 (31.92) wrote:

@Pennyperson

Cheniere Energy Partners (CQP) owns and operates the Sabine Pass LNG receiving terminal where the parent company (Cheniere Energy (LNG)) is talking about building a regasification facility.

I have some CQP.  I hope they do build it, CQP would _print_ money.  But LNG took on a lot of debt to build the facility, and this seems like a hail mary.  They say it won't be online until 2015 at the earliest.

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#14) On January 08, 2011 at 6:44 PM, Pennyperson (< 20) wrote:

hail mary -HMM

I love your blogs, but, a hail mary is a little extreme and 2015 is cool. The future....where we gonna be in 2020? = more NG

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#15) On January 08, 2011 at 7:10 PM, ajm101 (31.92) wrote:

Doh, I meant liquifaction facility, not regasification.

Also, the 'hail mary' was with respect specifically to Cheniere Energy (LNG, the stock symbol), the company proposing the LNG export facility addition.  At some point I read that they had a lot of debt coming due in the next couple of years.  I don't know whether they've refinanced it or not.  Not the industry as a whole.

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#16) On January 08, 2011 at 9:50 PM, dragonLZ (99.53) wrote:

I think Quicksilver Resources (KWK) is a very interesting play in this field.

I think this stocks has a very good chance of at least doubling from today's $15 price. 

Actually, I wouldn't be surprised if KWK stood for a KWiK 50% gain in the first half of 2011.

Quicksilver Resources Inc. (Quicksilver) is an independent energy company. The Company is primarily engaged in exploration, development and production of unconventional natural gas onshore in North America. Quicksilver owns producing oil and natural gas properties in the United States, principally in Texas, Colorado, Wyoming and Montana, and Canada in Alberta and British Columbia. As of December 31, 2009, it had total proved reserves of approximately 2.4 trillion cubic feet equivalents (Tcfe) of natural gas. Quicksilver also has exploration activities in North America, principally in the Horn River Basin of Northeast British Columbia and the Green River Basin of Colorado. It also owns approximately 61% of Quicksilver Gas Services LP (KGS), a midstream master limited partnership controlled by Quicksilver. It owns approximately 40% of the limited partner units of BreitBurn Energy Partners L.P. (BBEP), an oil and natural gas exploration and production master limited partnership.

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