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Cooking With Natural Gas

This year I have given three presentations and written numerous articles on the energy markets. If you caught any of my presentations, you heard me say something like this: “If you don’t take anything else away from this presentation, pay attention to this slide:”

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I most recently delivered that slide on May 12 at Investing Daily’s annual Wealth Summit in Las Vegas. I advised investors who were kicking themselves over missing out on the rally in oil (at that point up nearly 80% from the February lows) not to miss the opportunity in natural gas.

As I pointed out then (and have done so repeatedly in articles here), each time the price of natural gas dropped below $2.50 per million British thermal units (MMBtu) over the last two decades, it proceeded to more than double within two years. The only exception to this rule was 1997, when it took until 2000 for prices to double. The same market dynamics that caused prices to double in the past are evident today, and the price when I delivered that presentation was hovering around the $2 mark.

Because we didn’t view that natural gas price as sustainable for very long, we have been loading up the portfolios in both The Energy Strategist and in MLP Profits with companies that should benefit from an eventual natural gas rally. I cautioned that the timing was uncertain, but that it would likely happen well before it became obvious the natural gas inventories were returning to normal from their current record-high levels (as has been the case with crude oil).

On May 2, in Natural Gas Is a Natural Buy, I wrote:

“It’s a certainty prices will spike. Will they spike this year or next year? Will it be like 1997 again, which saw flat prices for four years before prices tripled? It doesn’t really matter for long-term investors, as long as you buy companies that aren’t overly leveraged. You want those that can withstand these prices for a year or three if necessary, and if the spike comes sooner you will reap the rewards without undue risk.

Right now natural gas companies look like good risk-reward options. We want to limit downside risk in case it takes demand a few years to catch up. There are many demand drivers unfolding (LNG exports, power companies switching to natural gas, a renaissance of chemical manufacturing), but should natural gas prices remain depressed for another year we don’t want to get caught holding a bankruptcy candidate.”

Natural gas inventories are still quite high by historical standards, but the price has started to rally. Since I wrote that May 2 article, the Henry Hub spot price for natural gas has risen by 30%, most recently closing at $2.48/MMBtu.

Our Best Buys portfolios, heavy on natural gas plays, are also rallying. Appalachian gas gathering MLP CONE Midstream Partners (NYSE: CNNX) has returned 35% since joining the MLP Profits Best Buys list on April 16, and it’s a growth story we’re updating for subscribers this week.

Three of our top four Best Buys in The Energy Strategist are natural gas producers, and they are all hitting 52-week highs. All three are up at least 40% year-to-date. Another Buy in our Energy Strategist Conservative Portfolio, Canada’s Peyto Exploration & Development (TSX: PEY, OTC: PEYUF), has broken out to a 21-month peak. All of our natural gas recommendations remain Buys at current price levels, but some are approaching our Buy limits.

Should natural gas retreat from its recent highs, you may get a second opportunity to pick up these producers at a discount. There has been some resistance at around $2.50/MMBtu, so there is some potential for a pullback. In any case, there are plenty of companies in the sector that remain values. Further, many of the midstream companies that will benefit from higher natural gas prices have yet to experience significant movement. As with the natural gas producers, we believe it’s just a matter of time. As I concluded in that May 2 article:

“Following the herd too often leads to a slaughter. You have to have a plan, and you have to maintain discipline. Think about the likelihood that natural gas remains at the present level of $2/MMBtu, and then decide what you are going to do about it.”

If you aren’t yet a subscriber of The Energy Strategist or MLP Profits, we would like to invite you to try us out risk-free. The energy bear market is behind us. Be on the train before it leaves the station.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 


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