Upended by Natural Gas

 | Feb 06, 2012 | 7:30 AM EST
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Natural gas is too low and too unused for our own good.

As I go from conference call to conference call for the capital goods makers, I am struck by how few companies are set up for, or saw, this natural gas plunge coming. Of course the big natural gas companies didn't see it coming. That's understandably obvious as you listen in to the painful ExxonMobil (XOM) conference call where second-guessing is on everyone's mind If XOM were to even give lip service to the surface fuel market for gas then you would feel better, but it is pretty clear from that conference call that they have no idea what to do with the stuff.

Range (RRC), EQT (EQT) and Encana (ECA) all need foreign companies feeling confident enough on the long range prospects of LNG export to take a stand and do some buying. They were sure doing it when prices were high. I don't know why they aren't doing it when prices are low.

The pressure points from the decline that we hadn't thought about is the dramatic ratcheting back in fracking and all of its attendant needs from service companies to trucks that need to bring sand to far-away places to pipelines that now won't get built because it is uneconomic.

Those are real issues, issues that were called out on the Cummins (CMI) conference call because fracking requires sand and water trucks and that had been a huge part of the demand story in the U.S. It is not enough to cause a guidedown but Cummins brought it up and that's worrisome.

Just as difficult to fathom is the idea that natural gas' decline could really hurt the coal industry longer term. The longer that it becomes obvious that we have so much natural gas in this country -- something that the government's numbers say we don't but the market says we do -- the more likely that utilities that can switch will switch to natural gas.

More importantly, the more likely we see the president maintain his lead over the Republicans, the more likely that the utility companies that still use a lot of coal will have to accelerate the closing of those plants and the switching to natural gas.

The rail industry's most important cargo is coal. Natural gas is shipped by pipe. So they get crushed but this change and it WILL impact their numbers. It is one of the main reasons why the rails have lagged causing the transports to lag with them.

We are now far along enough in the winter that even a couple of cold snaps will not improve the pricing of nat gas. We are also not far along enough in its use as a surface fuel to have an impact. We don't have any hubs yet to export it and we won't until 2016.

The chemical companies are building plants here to take advantage of the low prices, but only Dow (DOW) is really expanding with alacrity.

Of course, there is one huge benefit: 60% of the people in this country have homes heated by natural gas. That's a big relief, bigger than tax relief, and you can bet it will help retail.

But be aware that some very big industries are being upended by this nat gas decline and more companies right now are being hurt than being helped by the sudden plunge.



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