Natural gas stocks are red hot today on the back of bullish weekly inventory data from the Energy Information Administration. I called a move in natgas stocks in my Real Money column of December 18 and there has been a strong move in the five stocks I mentioned in that column. Details are below.
Stock. 12/15. (cls) 12/28 (3pm)
- AR $17.66. $19.60
- CHK $3.51. $4.05
- ECR $2.14. $2.43
- RRC $15.63. $17.61
- SWN. $5.12. $5.77
Sentiment on nat gas stocks in winter is always going to be driven by the market's perception of the amount of gas that will be withdrawn to meet heating demand. So colder weather is the natgas bull's friend. Well, I just walked across the street in Lower Manhattan to grab my lunch and my face hurt by the time I got through the crosswalk. It is just brutally cold here in NYC and in the rest of the Northeast as well.
So, we've had a nice little move in the group, but should an investor sell into this improved market sentiment on natgas producers? As TheStreet.com founder Jim Cramer says about Apple (AAPL) stock "buy it don't trade it." I believe that is also the prudent strategy for natgas stocks investing as the calendar flips to 2018: hold on.
Remember also that many small companies classified as oil expiration and production companies (oil E&Ps) also produce natural gas. Pure "dry" gas--chemically CH4 or methane--is often a by-product of oil reservoir exploitation, and most wells also produce some natural gas "liquids," like ethane or pentane.
So the oil E&P stock you own may actually produce a significant amount of natural gas, as well. My clients and I own Sanchez Energy (SN) stock and I was re-reading the company's latest investor presentation last night. Sanchez trades as an oil E&P, but actually the company's production is composed of three nearly equal components; oil, natural gas and natural gas liquids. So, for SN the move back toward $3/mmBTU natgas prices is just as important as the move through $60/barrel in West Texas intermediate oil prices.
I've been bullish on carbon fuel pricing for the entire fourth quarter and someone bought me a drink last night (yes, that actually happens) to congratulate me on my call for oil to hit $60/barrel by year end. But what about the volatility? How do we know that oil won't slip back into the mid-$50s in January or natgas won't slip back into the $2.70 range if NYC gets blessed relief from this horrible cold?
We don't know. That's the whole point. If you invest in commodities you have to overcome that fear of the unknown and take a position based on analysis of the balance (or lack thereof) in supply and demand. Call it speculation if you will, that does not offend me at all. But as long as it's prudent speculation it can be quite lucrative.