Plummeting Natural Gas Prices Spurring Investments
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Natural gas prices have plummeted as a result of oversupply. The United States Natural Gas Fund (NYSEMKT: UNG), for example, saw wild price fluctuations within the last year. The ETF traded as high as $40.60 and as low as $14.25 within the past 52 weeks, and it trades around the $20 mark right now.
Volatility around natural gas has spurred investors to take different approaches. Some investors have jumped away from natural gas and headed into a slightly more stable commodity like United States Oil (NYSEMKT: USO). Oil has returned just over 4% this year versus a 25% loss for natural gas.
Also, while oil is volatile, the price is controlled by a cartel, making it hard for prices to experience extreme movements. Right now USO trades around $36, between its 52-week high and low of $42.30 and $29.02.
Furthermore, companies are changing their strategies around lower natural gas prices. Here are examples of how three firms are coping with the low prices and high volatility around natural gas.
Chesapeake (NYSE: CHK) cast natural gas aside in favor of oil. According to the company’s quarterly filing and investor information, Chesapeake is pausing its drilling for natural gas in favor of higher-priced oil. And the move makes sense – Chesapeake is allowing the supply of gas to fall before it continues drilling. For example, Chesapeake knows that Trinidad, one of the major natural gas producers, is expected to run out of reserves by 2020.
As it stands, prices are not high enough to bring profitability, and Chesapeake desperately needs profitability as it faces nearly a $6 billion cash shortfall from operations this year.
Oil and gas companies are only one industry affected by low natural gas prices. On the other end of the spectrum stand fertilizer companies. Fertilizer firms need natural gas in order to spark the reaction between hydrogen and nitrogen that creates ammonia fertilizer, a common gardening product.
But know another caveat – the US faces a shortfall on Nitrogen causing it to import over half of its nitrogen base. Thus, firms are adding capacity.
CF Industries (NYSE: CF), an Illinois-based fertilizer producer, plans to spend $2 billion to add capacity through 2016, the Wall Street Journal reports.
The company originally expected to invest between $1 billion and $1.5 billion for the capacity, which is expected to become usable in 2015, but high demand and low natural gas prices are factors that the firm considered when making the decision. Also, fewer companies are drilling and exploring for natural gas, leaving an open market for fertilizer companies.
Finally, Dow Chemical (NYSE: DOW) is taking a completely different approach. Dow plans to build a multi-billion dollar plant in Texas that will “convert natural gas into the building blocks of plastic,” the Wall Street Journal reported. Dow expects the plant to be opened in 2017.
Natural gas has numerous uses in creating plastics, but here is one example. When companies create plastics, moisture can cause blemishes, cracks, and other product abnormalities. Adding a natural gas desiccant to the drying and manufacturing process gives companies control of the moisture in the air, creating a higher-quality product.
In all, low natural gas prices are not all bad. Long investors looking to diversify their portfolios and exploration companies who sell natural gas have been hurt by low prices.
However, the natural gas producers are only the sell-side. The buy-side of natural gas enjoys the price breaks, spurring some of these firms to begin capital investment in their businesses. Oil and gas companies may be laying off employees whose previous job was exploring for gas, but capital investment projects by buy-side gas users have created jobs by adding capacity and building new plants.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
