I hope you are following along on MarketWatch.com. In the past few months, I have laid out an argument for being cautious in general on most investing, but to be aggressive on natural gas stocks.
Quite frankly, with natural gas stocks down 50%, 60% and even 70% from their multi-year highs, I am beginning to feel like it’s Christmas in July. I am entirely serious when I say that buying natural gas stocks is the easiest investments I have ever made. The extremely high level of long-term safety combined with the upside potential is breath taking. While what I am buying won’t make what some of my biotech or solar investments have, there is very little downside and much more upside than the general markets in my analysis.
The image you see to the left is actually called a Christmas Tree. It is what goes on the well at many natural gas sites. I have seen many of these as I have been to visit the oil and gas fields in Texas, Oklahoma, Pennsylvania and North Dakota recently.
In my latest trip to Texas that I just returned from, I talked with four executives of oil and gas companies, as well as, three executives of banks. Folks, while there are some dogs among the oil and gas companies, there are going to be some huge winners too. You should see where the smart money is going.
The work to investing in this sector is in finding companies that have assets that are more valuable than their debt and an asset mix tilted towards natural gas production over oil production. I have found several such companies and am actively buying their shares.
One such company has buying from two legendary billionaire investors and several hedge fund stars, yet the stock is still near its ten-year low. This won’t last long.
A sum of the parts analysis shows that stock could rise 300% in the next few years on only a modest rise in natural gas prices. If natural gas prices return to a normal level, which I believe is a near certainty for a reason I’ll talk about below, then the stock could rise 400-600% or more.
As I have accumulated natural gas stocks slowly this year, I am in fact down on those investments. For now! I am about to make my final buys over the next few months in anticipation of a rise in natural gas prices going into winter due not only to seasonal impacts, but also because in the 4th quarter the United States will begin exporting natural gas.
The Sabine Pass liquefied natural gas export facility is going through its final test runs as we speak. 80% of the capacity is already under contract for many years. This is the first step to America becoming one of the premier natural gas exporters to a world where natural gas prices are much higher than in the U.S.
The fact that America will be exporting natural gas starting THIS YEAR and expanding capacity throughout the decade is no small deal. The facility coming online this year could be exporting up to an equivalent of 4% of all the natural gas produced in America this year. That’s more than the glut we have now.
So, what does that mean? In short, higher natural gas prices are coming soon. This will be a boon for the survivors in the industry.
I recently did a podcast with one of the quantitative analysts I have working with me. In it, we discussed not only natural gas, but commodities, China and the dollar. It’s worth a watch and listen. I’m mainly on the second half of the video.
Clients of mine are loading up on natural gas investments that should easily beat the markets in coming years, and might beat by a lot. The key here is that we are taking less risk than investing in the general market because the lower than normal prices offer us what Warren Buffett calls a “margin of safety.” I believe the worst case for our investments is that we just might have to wait a little longer for things to play out.
However, Andy Hecht, one of America’s more followed authorities on commodity investing says the rise in natural gas prices will probably happen within 3 to 6 months. That might be true, it might not, but eventually those prices go up and the stock prices of companies producing natural gas will too.
If you’re not loading up on natural gas stocks, well, I think you are making a huge mistake.