You Need to Be in the Nat-Gas Trade

 | Jul 30, 2012 | 2:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

chk

,

eca

,

upl

,

dvn

,

xco

,

sd

One chart -- that's all I need. One chart to convince me, and hopefully you, that natural gas is the trade you must be in for the rest of the summer and into the third quarter. Only one chart from the Energy Information Administration -- and here it is:

 

Weekly Nat-Gas Storge
Energy Information Administration

 

This chart shows the amount of nat gas in storage, now hovering around 3.1Tcf, against the five-year weighted average of storage, represented by the shaded area. The first read gives you what you already know: Since the first of the year, natural gas has been a glutted market. The industry has overproduced, because of a surge in hydraulic fracturing and because leases in gas fields have forced many wells to be drilled, despite their economics.

We had a very mild winter, and usage for nat gas was lighter than in virtually every recent season. Utilities' conversions to natural gas and conversions of trucks and other vehicles to natural gas have been slow, finding little political support despite the many advantages. Consequently, since the first of the year, we've seen storage greatly exceed the five-year average, and the fuel trades as low as under $2/mcf.

We know all that.

But look at the trajectories of the two lines now, entering the late summer and into the fourth quarter. Look carefully. That's right -- the current storage is quickly converging to the five-year average and looks like it will drop beneath that shaded area if the trends continue, by the end of the fourth quarter.

That because the big natural gas companies have had some limited success with sequestering of wells, led by Chesapeake Energy (CHK), which has begun to drop production. Some power conversions from coal to natural gas are about to be completed. But the biggest support for natural gas has come from the weather, a historic heat wave across the middle of the country that began in late June and has continued with little relief through July and, if forecasts are correct, into August. That has put unprecedented pressure on power grids to produce power for air conditioning, which is by far the single biggest user of natural gas.

The heat wave is quickly eating up the surplus of natural gas.

It's already having its effect on the price of natural gas, which now trades over $3.10/mcf and is, I believe, on its way to over $4 by sometime early in the fourth quarter. That's a doubling of price that is not yet reflected in any way in the dedicated natural-gas stocks. This makes nat-gas stocks not only the best value sector in energy but some of the best medium-term stocks to own in the entire S&P 500, in my view.

The names I will give you to buy and hold for the next several months will come as no surprise to regular readers, as my favorites in the space haven't changed at all. They include Encana (ECA), Ultra Petroleum (UPL), Devon Energy (DVN), Exco Resources (XCO) and SandRidge Energy (SD). Don't be fooled particularly by Encana -- every piece of news of the Michigan price-fixing scandal that drops its stock is an opportunity to buy, just like the rest of these names.

There's still value in the energy space -- in natural gas.

Columnist Conversations

GS has cleared the important hurdle on the way up which increases the odds for an eventual rally towards the 1...
A good quarterly report has sent shares of Calamos Asset Management (CLMS) sharply higher. CLMS was up about ...
Electronics distributor Ingram Micro (IM) reported better than 16% growth in its Q3 sending the stock up about...
Market posting decent day considering Ebola getting headlines again. Believe investors have learned not to pa...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.