A Bet on Higher NatGas Output

01/20/2011 10:28 am EST

Focus: COMMODITIES

Curtis Hesler

Editor, Professional Timing Service

This supplier of compression equipment to the drilling industry will profit from increased production regardless of its effect on prices, writes Curtis Hesler in Professional Timing Service.

Natural gas prices have been dismal, but they are improving. There seems to be a technical floor at $4 per million British thermal units, and a rally in crude this year should bring natural gas up at least 50% to about $6 per mBtu ... but I am not interested in buying natural gas production.

Natural gas wells normally play out relatively quickly, and gas production requires a lot more drilling than crude oil.

I once read a piece about a fellow who got rich on tennis balls. He did not get rich making tennis balls, but in providing the special wool that comprises the tennis ball fuzz. The big money in natural gas is “in the fuzz.”

I’m searching for service companies and suppliers of natural gas field equipment. As prices and demand for gas improves, activity will increase and ancillary companies will make a killing without the direct price risk inherent in the natural gas market.

Natural Gas Service Group (NYSE: NGS) hits more to the heart of the natural gas matter as a major supplier of compression equipment and services to the natural gas industry. Sales (actually leases) are strong, and profit margins are quite generous. NGS does not pay a dividend, but the growth prospects are excellent.

We need to see some weakness in order to pick this up decently and shave off some market risk; but when crude sells off and the energy sector at large sees some profit-taking, I think NGS will come down to $17.50 where it is an excellent buy. [Shares briefly dipped to $17.55 on Jan. 6 but have since rebounded to $18.31 as of the Jan. 19 close—Editor.]

[Some of the factors that made natural gas one of last year’s worst investments could weigh on the commodity again this year. One of the operators of gas pipelines has done a whole lot better, and Jim Jubak suggests waiting another month before buying it—Editor.]

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