Thursday, April 11, 2013

Full Of Gas!!!

Natural gas (NG) has more than doubled to around $4.10/MCF, from the 2012 lows of $2.00./MCF. The market has been very bearish on nat gas, for some time. Some even speculated ( last spring ) that since America is so full of gas, thanks to fracking and shale revolution, the price could go to zero! Huh !! zero article. As many know, I'm generally not a fan of commodities, but I do like to buy them when they sell for less than their marginal cost of production. At that point, producers must act, cutting supply and looking for new demand opportunities. Nat gas, over the past year has fit that bill. Recently, the UK's largest utility, Centrica PLC, has signed a 20 year deal to import liquefied natural gas (LNG) from the U.S. Other similar deals are likely to occur as NG trades significantly higher in other parts of the world as compared to North America ( $15/mcf in Japan). The good news for us as investors is the market has been slow to react to the shift in the winds of NG. The stock of many NG producers have lagged, particularly the larger cap firms. I prefer the U.S. producers, due to scale and distribution advantages ( Ecana excluded ) over many of the smaller Canadian producers. Several U.S. producers are also under fire from activist shareholders which could help unlock value going forward. I like the basket approach to NG, owning several cheap names in the space. If your heart is set on owning only Canadian stocks, then Ecana (ECA) is a buy here @ 19.

I like and own Sandridge Energy (SD), Exco Resources (XCO) and Chesapeake Energy (CHK). These are longer-term plays and will require patience - like most value investments.

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