Revising My Natural Gas Play

 | Apr 11, 2013 | 3:00 PM EDT
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When I correctly recognized the turnaround in natural gas last summer in my column You Need to Be in the Nat-Gas Trade, I did a great job identifying the trajectory of storage and the slow but steady drop of surplus in natural gas that would lead to a price turnaround.

Unfortunately, instead of just recommending the commodity itself, I tried to find stocks that I felt were so closely leveraged to the price of natural gas that they would respond to what has been a big move from around $3.40/mcf to (today) above $4.10/miff. Again, unfortunately, the stocks I suggested, including EnCana (ECA), Ultra Petroleum (UPL) and Devon (DVN), have refused to respond to the move as I had expected. The reason has been clear: While natural gas has rallied, the production where these companies are leveraged has been drying up

There has been a massive rush to liquids drilling -- any company capable of it has been frantically attempting to accomplish this in the last two years (Devon is  good example). Plus, the needed drop in production that has been forced on over-leveraged companies dealing with a depressed price (see Exco Resources (XCO) and Ultra Petroleum).

Instead, the Marcellus region has seen continuing production increases where the price rise in natural gas has translated to booming stocks: Cabot Oil and Gas (COG), Range Resources RRC, Southwestern (SWN) and EQT (EQT) are four companies whose share prices have been screaming.

As I expect natural gas prices to continue their rise to $4.50 and perhaps beyond, I'm not going to be fooled again. I'm going to get long the futures directly. If natural gas has another $0.50 of rally in it, I want to participate. I'm looking at August eminis traded at my old home on the NYMEX.

I also want to have stocks that will directly benefit, but Marcellus stocks have been just too strong for me to jump on right now. Above 100 P/E ratios in Cabot Oil & Gas just make these momentum plays scary, even for a lifetime futures trader. Still, in the bunch of Marcellus stocks, I believe EQT to be the best value as it has "only" rallied from around $60 to $70 since the late third quarter of 2012.

I'm also looking at other plays to see some value. With Haynesville rigs down to little more than a dozen and other established plays equally depressed, I need something else -- perhaps in the Wattenberg and Niobrara regions (leading me back to Noble (NBL) and Anadarko (APC), perhaps in the Permian basin (taking me back to old trading friend Cimerex (XEC) perhaps).

The point is that I'll want a mix of stocks and futures for the next natural gas run. And hopefully, as The Who's old song goes, "We Won't Be Fooled Again."

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