No Quick Fix for the Gas Giant

03/26/2012 11:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

New drilling technology and a lack of export terminals could keep North American natural gas cheap for a while, says Roger Conrad, editor of Utility Forecaster.

Roger, natural gas prices have been in the news a lot lately. Where do you see that market headed?

Well, obviously they’ve come down in a very big way the last year or so. That’s actually part of a trend that began after Hurricanes Katrina and Rita, when gas prices peaked out in the high teens.

The reason is because we’ve discovered a method of exploiting reserves that people know were there, but that were basically locked in rock, and it’s called hydraulic fracturing. It’s the method being used, and it is producing many more reserves of oil and gas, particularly natural gas have been opened up around North America.

So we have seen a tremendous increase in new supplies. That’s taken supplies in storage to record levels. And we’ve just come through a pretty mild winter. I guess it’s not over yet, but it looks certainly like the heating degree days are going to be well off where they’ve been in the past. All of that has led up to a glut.

Gas also has the disadvantage of being pretty much locked in North America. If you look in countries like the UK, gas prices are four or five times what they are here in this country, because there’s a shortage there, but we can’t export our natural gas. All of the facilities for liquified natural gas are geared for imports, and that’s because they were built with the idea that 2005 and 2006, that scenario was going to be locked in forever.

Now that gas is so abundant and cheap here and ready for export, it’s going to take a few years to be able to get these facilities in place and turn them around. I think incidentally, that’s going to be a great business going forward, but in the meantime gas could fall to $2 or even lower.

Now, do you see the best way to get exposure through individual stocks or through an ETF? What do you suggest?

I’m a huge fan of individual stocks. I think you pick out what you want. You know what you own, which is very, very important.

A lot of funds are basically a black box to investors. You don’t know what they own, and sometimes they publish a list of what they own at a certain snapshot in time, but that’s no assurance that’s what they own all of the time.

So I think investors can really lock down what kind of income they can get, what kind of companies they own, by picking individuals. I realize not everybody wants to do that, but I think that is the best way.

ETFs can give you a nice play on a major trend. For example, if I wanted to bet that natural gas prices were going to come back in a big way, I might take a look at some of the ETFs maybe that own or represent the commodity natural gas. But if I’m investing for income and investing for the long term, if I’m investing for long-term capital growth because rising dividends raise stock prices over time, then I want to go with individual stocks.

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