Could prices move higher?
There are two things that could quickly turn around the price of natural gas.
First, growth in the U.S. economy could accelerate, driving up demand. That would be a good thing for lots of reasons, but it basically makes the natural-gas companies captive to economic growth. From this perspective, as an investment the sector resembles housing --investors who can call the turn will do well.
Second, the skeptics about the longevity of shale-based natural-gas production could turn out to be right.
Estimates of the production curve over time of a natural-gas well in a shale formation are based on an analogy with the production curve of traditional gas wells. But no one really knows, the skeptics point out, how quickly peak production from a shale well will decline. There could be less gas in the industry's future than most natural-gas companies now project. (In a related development, in its annual outlook the Energy Information Administration cut its estimate for unproved technically discoverable natural-gas reserves in the Marcellus shale formation by 65%. That reduced total estimates for all U.S. shale natural-gas reserves by 41%. I don't know which estimate is more accurate. The production history of these formations is so short that estimates are likely to remain volatile for quite a while.)
So how does this play out for investors?
Favor companies with U.S-based liquid production over natural-gas production. The U.S. gas glut is difficult to reduce, because exporting gas from the United States requires a huge investment in pipelines and liquefied natural-gas terminals. On the other hand, U.S. oil producers are in the business of replacing imported oil with domestically produced oil -- and seeing the price of domestic oil supported by a global market that seems to be set at $100 a barrel. The price spikes above that every time an oil producer threatens to reduce oil supplies. The Energy Information Administration projects oil imports will fall from 49% of total consumption in 2010 to 36% in 2020.
I've repeatedly posted about some of the U.S producers that benefit from being liquids-heavy (see this post from Oct. 21, 2011, for example. ) And on Jan. 13 I added one of them, Pioneer Natural Resources (PXD, news), to my long-term Jubak Picks 50 portfolio. So, enough said on that angle.
Look also at U.S.-based chemical companies that will benefit from the low prices on one of their key raw materials, natural gas. I've got DuPont (DD, news) in my Jubak's Picks portfolio, and chemical companies , Cytec Industries (CYT, news) and FMC (FMC, news) all are picked by Wall Street to grow earnings in 2012 by 16% or better.
And finally, favor companies that are focused on shallow- and deep-water drilling over those with big exposure to U.S. land-based drilling. Any slowdown in drilling activity would hurt the latter companies more, and evidence from recent earnings reports shows falling North American margins as these companies pay to shift rigs from natural-gas drilling regions to liquid-heavy regions where drilling activity is still expanding.
The playing field is tilted even more by recent evidence that lease rates for ocean-based jackup drilling rigs have rebounded from a three-year low. For example, Noble Energy (NE, news) -- don't get it confused with Noble Energy (NBL, news) -- recently signed a contract to leave a jackup rig in the North Sea at a day rate of $122,000, up from a prior contract at $91,000 a day. Deep-water rig day rates, which never fell as hard as the jackup market, remain relatively stable. So I'd emphasize drillers with big jackup exposure such as Noble, Ensco (ESV, news) and Rowan (RDC, news) over drillers with heavy North American land exposure such as Halliburton (HAL, news)and Baker Hughes Incorporated (BHI, news).
You might want to wait for some of the euphoria to wear off over strong U.S. fourth-quarter growth in the gross domestic product before adding any of these stocks to your portfolio. The Federal Reserve, which said Jan. 25 that it would extend exceptionally low interest rates of 0% to 0.25% through the end of 2014 (instead of just the middle of 2013) doesn't think fourth-quarter growth rates will carry over into 2012. I don't, either.
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund owned shares of DuPont and Pioneer Natural Resources as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund's portfolio here. Holdings through the end of 2011 will be available there in the near future.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
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Good for you 72. So what's your problem? When it comes to non renewable resources it's drill and use now and freeze later if you are referring to heating needs.
Wac72 stop building 12,000 sq ft homes that you don't really use much and stop making the ultra rich even richer.
