Private equity group Blackstone (BX) is making a play in natural gas. CEO Steve Schwarzman is a savvy investor, and while valuation must clearly be a rationale behind the group's purchase of Royal Dutch Shell's (RDS.A/RDS.B) Louisiana field, I just wonder if the well-connected Schwarzman doesn't know something more, like maybe that there's a move in the works by Russia to cut off natural gas sales to Europe in response to U.S. economic sanctions.
That would surely make the price of natural gas skyrocket along with the valuation of Blackstone's stake in that gas field. (Disclaimer: The deal is not yet finalized.) I know this sounds like crazy conspiratorial talk on my part, but, at the same time it's not uncommon for many of Wall Street's big boys to have access to information that the rest of us don't, so I have allowed my imagination to run wild a bit.
Seriously, though, the purchase of gas as a long-term investment has been a theme of mine ever since the U.S. started expanding gas exports. As I have noted in the past, with world gas prices anywhere from 3x to 4x higher than in the U.S., the expansion of export sales is bound to cause the price of domestic gas to trend closer to the world price over time.
I, for one, do not see any reason for a nation to export its nonrenewable energy supplies, but I am not the one crafting policy. It's high folly and the epitome of short-sightedness to do such a thing. You burn your oil and gas and then what? It's gone. You sell it off and someone else burns it, so what do you get? Some dollars that your nation has the monopoly power to issue.
If domestic gas producers want higher demand for their product, they should lobby Congress for more economic stimulus (income/jobs) in the U.S. rather than demand that export restrictions be lifted. At least that way Americans would be able to enjoy the bounty of their cheap energy here rather than sell it off to another country.
After hitting a low of around $1.98 per million BTUs in April 2012, natural gas prices have been slowly but steadily rising. While the current price of around $3.87 per million BTUs is a 10-month low and an apparent setback from the rising trend that I have been talking about, I think that it is a good buying opportunity, as demand, weather factors and the arbitrage-related effects of those export increases support prices over time.
By the way, with respect to weather factors (and they do have a strong impact on gas prices), weather forecasters are already talking about another polar vortex arriving in the eastern third part of the country in September, so that could have a major effect.
There are a number ways in which investors can play natural gas. The purest of all is to buy natural gas futures, although in that situation there is unlimited risk, so it's probably not an appropriate strategy for most investors. In contrast, you can put on bullish option spreads in a way that keeps total premium down to a minimum. Of course, that would lower the leverage and keep the ultimate return somewhat less, but at least the risk would be limited.
With respect to equities, consider Chesapeake Energy (CHK), Devon Energy (DVN), and of course you can always by Blackstone.
