Financial Professionals

Market Insights

A A A

Time To Dabble In Natural Gas

05/09/2012
One of the worst kept American secrets is the tremendous social opportunity the usage of natural gas would be for both American enterprise and consumers. Tell me, who exactly is it that would not benefit from a shift to a natural gas energy platform for America?
 
The benefits are obvious: creation of jobs, less reliance on foreign oil, etc. The lack of execution by Washington policy makers is nothing short of mind boggling, in particular at a time when the spot price of oil is trading slightly below $100 and the spot price of natural gas trades sub $3.
 
However, keeping myself honest, I remind all of us that there are both social consequences and market consequences for money managers to dissect. While the significant decline in spot natural gas prices has beneficial social consequences, that has not to date translated into favorable market consequences. Investments in natural gas-themed assets have been unprofitable.
 
Since early 2008, only once, in the final three months of 2009, have natural gas spot prices sustained any form of rally (Figure 1.1). Even in late 2009, the rally was too short in duration for investors to capitalize on. 
 
I expect the trough is near. For the reasons sighted below, investors may begin once again to make investments in natural gas entities in both the equity and debt markets.
 
•   Spot oil prices are currently unwinding some of the speculative froth as the “Iranian premium” is temporarily removed from the market
oSubsequently, I expect natural gas plays to be the beneficiary of reallocated investment dollars from the oil sector
 
•   Two recent natural gas headlines are indicative of a “negative sentiment bottom:”
      o  The liquidity and management issues surrounding U.S. natural gas giant Chesapeake Energy’s CHK Natural Gas
      o  Recent news that natural gas hedge fund legend John Arnold will close his natural gas fund after 10 years
  
•   Recent data suggests power consumption in the electricity sector will rise 21%, well ahead of previous estimates, as a significant switchover from coal to natural gas is unfolding to realize the current significant cost advantage in using natural gas
 
•   Storage capacity is near full, which will discourage significant injections of natural gas into storage during the March to October injection season
 
•   EIA projects that during the March to October injection season, only 1,623 bcf will be added to storage – the lowest level since 2002
 
The type of assets investors should begin to conduct due diligence on
 
1.   Debt ownership
 
2.   MLP infrastructure and distribution
 
3.   Wet gas versus dry gas producers
 
4.   Potential LNG transporters  
 
The title of this blog, “Time to Dabble in Natural Gas,” does not mean anything other than to position extremely modestly. The trough cycle may play out over multiple months. However, for the first time since 2007, there is evidence that positioning from the long side in natural gas assets is plausible
 
Figure 1.1 Natural Gas Spot Prices, January 2007 to Present

Source:  Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.