As Gasoline Rises, Buy ... Nat-Gas Stocks?

 | Feb 24, 2012 | 9:30 AM EST
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Here's an idea that's outside of the box: How about buying some natural-gas stocks because the price of gasoline at the pumps is going to $5 a gallon?

OK, stick with me here, because I think you'll see my logic in a second. And the first thing to throw away as a trade idea is the obvious one, based upon rising gasoline prices: the refiners.

It is so obvious, in fact, that I'm not sure it won't work, even here. But there is nothing fundamentally good about the refiners, just because the price at the pumps is rising. They still make their money on the differential between the costs that they get for their finished products vs. their input costs, which is the crude oil they refine.

And the differential, expressed in the oil markets as a "crack" spread, has not been significantly exploding, despite the rising prices at the retail level. They're doing a bit better, but if you're looking to capture a big price move in refiners on the basis of what you see when you fill your Nissan, you've already missed the move.

The time to have bought the refiners was at the start of the year, when, (ahem), I recommended them.

But now, HollyFrontier (HFC) isn't trading for $23, it's trading for $35, and CVR Energy (CVI) has rifled from $19 to $29. Sorry, folks, there might be some more upside left in these issues, but for the most part, the juicy money has been made.

But try this idea on for size: natural-gas stocks.

Here's my thinking. As gasoline prices continue to ratchet higher through the spring and into the summer (and I have a whole theory why this must happen, which I'll save for another time), there are sure to be literally millions of drivers who will either have to give up their cars or find another idea for transportation. And despite the lack of infrastructure, it is possible to both buy and self-fuel a natural-gas-powered car today.

Honda makes a perfectly well-appointed Civic that gets an equivalent 38 miles to the gallon on the highway running on natural gas. Installing the apparatus to fill your new Civic from your home natural-gas line can be done for a little less than $3,000, and prices are coming down fast.

Now here's the kicker: The equivalent cost of a "gallon" of natural gas is about $1.65.

Like that idea?

I'll admit it, not many people will go the entire route to be locked into refueling only at home and committing in the long term to a natural-gas-powered car, but not many have to -- we only need a large enough group to begin the conversion to get some real excitement going for the natural-gas space, an excitement that's been missing for a long, long time -- since 2007, in fact.

I think it could happen. And the beauty part is that there isn't one natural-gas name that isn't dirt, dirt cheap right now under the scenario I'm painting. Throw a dart at the names: Devon Energy (DVN), Cimarex Energy (XEC), Cabot Oil and Gas (COG), SandRidge Energy (SD), Oasis Petroleum (OAS) -- and OK, I'll even toss in my most hated natural-gas stock, Chesapeake Energy (CHK).

You choose the stock, it doesn't matter. Because, in a $5-a-gallon environment, $1.60 a gallon for natural gas is going to start to look pretty darn good to some enterprising people.

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