Get 'Em While They're Cold: Natural Gas Stocks Now a Bargain
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The big news in the utilities sector these days is the falling price of natural gas. Normally, this time of year would have gas futures over $5—which is where they were at this time last year, according to Nightly Business Report. These days, the price is more like $2.47 per million British Thermal Units (MMBtu), the lowest in 10 years. This has translated into great savings for consumers and businesses that use this commodity and not-so-great returns for suppliers and investors. What’s going on here?
According to analysts, there are several reasons for the depression of natural gas prices, not the least of which is the weather. Even though old man winter has finally reared his cold, snowy head, this has been an unusually mild winter. And, with only two months to go until spring, it seems unlikely that there will be any extended periods of very cold weather on tap for the season.
Then there is the supply side of the equation. Obviously consulting the wrong crystal ball, suppliers had expected a much colder winter this year and so stored more natural gas in the fall of last year than they normally would have. New extraction methods, such as the somewhat controversial rock fracturing or “fracking” technology, has resulted in utilities locating and mining the energy source from areas previously considered off-limits.
If winter ends early, prices could fall even further. This may sound like a particularly depressing investing scenario, but there is a bright side to this tale of woe. Prices won’t stay low forever, and here’s why. As natural gas prices fall, it begins to be viewed as a great “alternative” fuel.
Electricity-generating utilities have been building more natural gas than coal-fired plants for several years now, and the currently low gas prices are expected to cause more to be built sooner rather than later. And while shortages of natural gas have caused such plants to have short life spans in the past, extraction of gas from shale rock seems to guarantee an almost endless supply. In addition, some wind and solar energy projects have been put on hold in favor of plans that use cheap, domestic natural gas instead.
Since supplies were always considered limited, exporting natural gas was never really considered profitable. With new extraction methods, however, there has been talk of doing just that—which would drive prices higher as new markets opened up outside of North America. Cheniere Energy, Inc. (NYSEMKT: LNG) has announced plans to begin exporting liquefied natural gas to overseas markets by 2015, and has seen its stock value rise meteorically as a result.
If you would like to get cooking with natural gas, there are several ways to take advantage of the low prices now and inevitable profits later. Exchange traded funds like the United States Natural Gas Fund LP (NYSEMKT: UNG), one of the largest and most popular of the gas commodity ETFs, is one way to get involved directly short of becoming a futures trader. Be aware, however, that many analysts consider gas ETFs less than stellar investment instruments.
For most investors, though, equities make the most sense. ExxonMobil (NYSE: XOM) offers substantial investment in natural gas as well as oil, and the company’s dividends will make any investor smile. Chesapeake Energy (NYSE: CHK) is predominately a natural gas company, a natural choice for investors who want maximum exposure in that quarter. Another good bet is Devon Energy Corp. (NYSE: DVN), whose rumored movement toward LNG will not only expand its natural gas profile but may put it in the export market, as well.
The Motley Fool owns shares of Devon Energy. sunnyspot has no positions in the stocks mentioned above. 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.