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.
Click here to find Jubak's most recent articles, blog posts and stock picks.
More from MoneyShow.com:
VIDEO ON MSN MONEY
During his State of the Union Address to a joint session of Congress Tuesday, Obama noted, "We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy."
"Experts believe this will support more than 600,000 jobs by the end of the decade. And I'm requiring all companies that drill for gas on public lands to disclose the chemicals they use. Because America will develop this resource without putting the health and safety of our citizens at risk," he said.
Typical, eh. Obama wants to invest more money in Natural Gas now when the ones that are drilling are backing off for lack of return. Then he blocks the Canadian pipeline that may produce half of those 600,000 jobs he wants to create. I just don't get it.
Anyway what difference does it make, we are going to drill, drill, drill. Energy is like food, we need it.
Like anything else (19th century railroads, 21st century homes) watch out for over drilling if you are an investor.
Hey upperdoper, how did you manage to post that message? Was it on an electronic device connected to an electronic network, all powered by electricity derirved from....wait for it....oil or natural gas? Yeah hypocrite, that's you.
....? US is mostly coal powered. Nuclear and Nat Gas make up other large segments. With increasing amounts from wind/solar/other renewables.
Oil is hardly ever used for electricty here. Unless it's diesel generators, which are a very small percentage of the total electrical output.
There's a huge overseas potential as well.
With oil becoming scarcer, natural gas is probably the most immediately available substitute for combustion engines. Given the growth of emerging markets, it's hard to see a world in 20 years that has enough oil.
Typical, eh. Obama wants to invest more money in Natural Gas now when the ones that are drilling are backing off for lack of return.
The drilling price for gas is incredibly cheap. Even at these low rates, they still make money. But they obviously want to make *more* money cause just making something is never enough where corporations are concerned.
Then he blocks the Canadian pipeline that may produce half of those 600,000 jobs he wants to create. I just don't get it.
That pipeline will not produce 300,000 jobs. Go look at any study and find that number. The *consistent* estimate is anywhere from 5,000-35,000 jobs could be created on the pipeline.
And it's going to go thru, they are looking for an alternate route, then it will be approved. Which is what should happen to protect the Nebraska Aquifer, which given the coming scarcity and expense of water globally in the next few decades, that aquifer is an *important national strategic asset*
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.
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.
More Market News
|There’s a problem getting this information right now. Please try again later.|