With the AECO spot price under $2, and the Henry Hub price at the mid $2 range, many investors are running away from gas stocks all together. Investors are also trying to play “hero” as they try to time the bottom of prices and so far have gotten burned.
The low gas prices have created a great opportunity to invest in solid companies that are currently focusing on their oil production, but have 30-40% of their assets in gas. Companies like NAL Energy, Enerplus, and Penn West are well managed and have sufficient cash flows from their oil operations to sustain their dividends and growth. But these companies are trading at a large discount and low multiples. This provides a great buying opportunity when you are looking for long-term investments with the upside of natural gas when prices go higher. We are also seeing great yields on most of these stocks, some as high as 8%. So if investors get in now and hold over the longer term they get solid yield and large upside potentials.
Another way to play the low oil and gas price is to short coal and the related industry. With a large amount of electricity producers switching to gas run operations, the demand for coal has shrunk, and should continue to downtrend until gas prices reach higher. At the same time we’ve seen demand in China expected to slow and companies have taken a hit, one to mention would be Teck Resources.
The final possibility to invest on the downtrend of gas prices is to look at companies that build their business on low gas prices. A company like Wesport Innovations manufactures natural gas run engines and has seen the demand for its products skyrocket as it becomes even more economical to switch to gas powered machinery. The company has seen its stock rise close to 300% over the past two years.
Are there any other possible ways to capitalize on low natural gas prices, and when do you think they will recover?
Buy CHK, WPRT, and RRC... then pray.
I'm not thinking so. The way to capitalize would NOT be buying the producers or any E&P name IE the CHK's of the world. CHK had to chop its production because there was so much nat gas that the supply/demand picture was distorted and the excess supply was the reason there has been a downward pressure on prices.
I would look into the nat gas vehicle players for a couple reasons.... - with nat gas so low it makes sense for transport/ shipping companies to switch to nat gas engines vs diesel and gas - nat gas cost advantage ($1.5-2 a gallon vs $3.5 - 4 in the US. Gasoline in Europe approaches 8+ in some places) - Nat gas vehicle market is growing at 20% CAGR over past 4 years - Nat gas prices are not going above 3 mmbtu anytime soon....
Problem is that the infrastructure needs to be developed to support nat gas vehicles (which we are slowly starting to see) Some names I would dig on. FSYS - focus on light vehicles. Inked a big contract with GM around a month ago CLNE - fueling stations and infrastructure
both have had quite the run this year....
Edit - this would be to capitalize short term on low nat gas prices. I think CHK has positioned themselves nicely long term when the supply/demand picture plays out and prices rise.
If N. Gas cheap should we switch to natural gas instead of paying 4.50 (i live in cali. so it is ridiculously high) a gallon.
I'm down ~25% on my UNG position. It is what it is.
Most people are down 100%...feel luck its only 25.
Don't leverage too much w commodities.... they tend to trend.
25% is still mediocre considering I purchased shares in January. In hindsight I would've been better off w/ nat gas companies rather than nat gas itself but my gameplan was 2 years so its okay. I will say I expected a stronger bounce than this.
.
some one txt monty and tell him to check it ...go!
Gas will have a 1 handle before a 3 handle - Mark it, FYI - LNG won't save it, there are big finds off the coast of south east Africa, all that will go to LNG.
China is developing its own shale, so China may even choose to export Gas and use coal. They have been known to short change their own people & environment for money. In the US, we still have drilling to hold acreage and incidental gas from wet gas & oil shale’s.
Long - Midstream processing, (need those NGLs), Gas engine makers Short - Gas E&P's, Exposed IPP's, Coal, even Wind (with or without PTC/CITC)
Citi just came out with a big 95 page report on the state of the nat gas industry....im trying to find it. If anyone else knows what im talking about post the link.
also interested in the Citi report. If anyone finds it, please PM
It is terrible to be invested in UNG because of the steep contango. I would blow out of there right now - the ETF structure sucks, the near-term fundamentals are against you, and the technicals are certainly against you.
I am a long-term natural gas bull, but there are so many things that need to happen for us to get there. Government getting behind natural gas vehicles, full buildout of export facilities, further rises in the cost of crude oil, etc. Also you can't forget that the second prices start to rise, there is an incredible amount of unprofitable reserves in the Haynesville and Marcellus that will come back online. If you are going long natural gas, you are betting that it becomes a significant part of our energy infrastructure and replaces other energy sources in a big way.
If you do want to make a long-term bet on natural gas, I would recommend a basket of gas-focused E&Ps. XCO is a good one, about 97% of its reserves are gas, and they have an interesting back story for those that care to dig deep enough.
So buy it now when it looks the worst lol?
It is what I told myself 3 months ago. By the time the fundamentals look good this thing is going to have exploded.
I sent you two the report. Forward it along to anyone here who wants to see it.
macro is a wise fella.
There is extreme contango right now in the curve, makes little sense based on jv12 S/D. The only way to correct the contango will be to force CHK's hand yet again, that means a major beat down of the entire curve. Or Mr. Obama comes out and does something to save the industry's butt and we great an extreme backs led rally which almost did in Jan/Feb before the contango got too wide. For now NGV/Exports etc are a 2015+ concern till Obama does something about it.
Sorry to say, for anyone who owns UNG, CHK etc this is going to not be a fun summer for you. Unless you want to bet on Barack.
The only reason I think we have not seen this beatdown yet, is that too many options structures were built around 2.25 for March and are being defended. Once we hit the summer look out below.
mb666 - i just left a comment in one of your old threads. In short, you need to understand what a negative roll yield is and how UNG works. I am not sure on the specific months, but UNG purchases futures contracts (say 2 months out), and holds onto it until the delivery date nears. When the delivery date rolls around, the fund liqudiates its position and buys more futures contracts (say 2 months out). If the term structure is in contango (which nat gas is), it means that futures are more expensive then current spot prices - this means the UNG will lose money every month on the "roll". Natural gas is actually in an extremely STEEP contango - meaning if spot prices do not move, you will lose a tremendous amount of money every month from the roll. Why doesn't the NAV of UNG ever drop to 0 then? The UNG splits whenever the price drops too low (as it did recently with a 1-4 stock split). If you don't understand what I said, pleaseeeee do some research ASAP.
this is a case of where you seem to be in over your head - where you don't understand the fundamentals behind the product that you just bought.
^ Thanks man... got your PM too.
Yea I wasn't aware of the structure... good thing that I'm in venture capital lol. Lesson learned though.
To play devil's advocate though wouldn't any commodity ETF in backwardation essentially be free money? Also, if you're short UNG it's kind of like free money too... what's the catch, especially if you can adequately hedge the risk w options?
I'm going to do a correlation study with spot future prices and UNG, adjusted lognormally.
Buy stocks of nitrogen fertilizers producers - nat gas is often more than 2/3 of total cost while demand is driven by demand for agricultural commodities. Plastics manufacturers should see higher margins too. That's if you want to play it through equities and in the long term.
I'm not going to give a full lesson on commodities futures on this forum, but in essence, yes, you could short the UNG and make money on the roll, and yes, many many people make money off of commodities when the futures are backwardated (there are many research papers out there demonstrating this). The risk is in a change in the spot price and a flattening of a backwardated term structure - this is something that hedgers will pay for in order to not bear that risk. Commodities are different from stocks and bonds in that in addition to being a financial instrument, they are also consumption instruments that are subject to supply and demand (and surplus (contango) and shortages (backwardation) or suppliers hedging (backwardation) vs. consumers hedging (contango)) in the real world... all in all a little more complicated than the typical S&P 500 ETF.
All in all, I would view UNG as a trading instrument for now... I don't want to tell you what to do with your investment / natural gas view, but this is the reason why you've lost 25% of your portfolio in 2 months, even though the spot price has been relatively constant.
There are a couple good papers out there explaining the source of returns from commodity futures (change in spot price, roll yield, and portfolio rebalancing): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=650923
Also, in case you randomly decide you want to be long volatility, a negative roll yield is also typically exhibited in the VIX ETF
lol if you lose 25% in one month i think you should find a new activity
Throwaway explained it very well.
As I mentioned you could have major convergence in the curve at the front. If you are short UNG during this, the effect of being short convergence may wipe out any gain you make solely based on prices. UNG has an inherent natural gas storage factor built into the ETF. How else would it deal with moving from Oct to Nov, or March to April.
UNG is good for trading within the month. But once the roll comes you are basically playing a storage spread and if you do not understand storage spreads. You really should not be looking at it.
Wouldn't the roll problem be priced in somewhat?
Here's a good article about contango issues (as well as a short history about commodity ETFs): http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investo…-contango-conspires-with-pre-rolling.html
But yea, commodity ETFs do an absurd job of tracking spot prices (see USO example in article). Some ETFs try to limit the effects of contango through swaps (I think to address storage spread). Lesson learned. Now time to learn about the mechanics of those 3x leverage ETFs.
I would GREATLY appreciate the Citi nat gas report, if someone could PM it. A banana will be given.
Man, coal is just getting kicked in the balls this year (and this week!).
I'd also love the CITI report if someone would pm it to me.
Buy Oil Sands producers.
to jump on board id appreciate it if someone would pm the report to me as well
Cheers
this is well after the fact, but here is a great kahn video on breaking down contango at a rudimentary level.
http://www.youtube.com/embed/wSqkieBUuo8
http://www.youtube.com/embed/C3KlN5kTWAs
Molestiae rem temporibus enim. Autem et ut molestiae sunt ea. Voluptate enim asperiores voluptatem autem neque.
Autem enim dolores eos non officia sint. Aut veritatis aperiam qui quia ullam. Harum et omnis et incidunt recusandae et.
Consequatur odio ea veniam sit voluptate quia voluptatum. Sed magnam reiciendis nostrum alias facere aliquam. Qui blanditiis velit ipsam qui repellat et accusantium. Necessitatibus iure aut laudantium consectetur accusamus suscipit unde. Exercitationem ut eveniet quod.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Rem repellendus dolor eveniet cumque. Enim libero exercitationem nihil doloremque officia aliquid earum inventore. In ut debitis magnam inventore. Temporibus beatae id sunt dolores eveniet nihil. Dignissimos eaque ut alias ut eum. Molestiae illo quaerat et consequatur voluptate. Excepturi quia magni praesentium fuga corrupti.