Natural Gas

[brtegdbx55]

This sector has had a heck of a run within the last 30 days. I keep raising my limit buy on EOG and am chasing the stock at this point. I've learned not to fight the trend and it appears Wall St. is willing to take nat gas higher as it has also had a great run recently. Could this be the story of 2008, much like oil was in 2005-2007? Should we expect a drastic drop off when Spring is nigh?

I've since raised my limit buy on EOG to $96. I'm interested to hear if you all think nat gas is overheated and due for a pullback and if my entry price is a safe bet based on TA and the price action in the commodity.

Thanks in advance.

PS: if there is a better play on nat gas other than EOG I am interested in hearing your opinion.

[Calvinpync]

MadCow,
Have you looked at CHK? I've been following this about 9 months (I believe it was featured in Smart Money Magazine in September 2007, which is where I got turned on to it) Its had an incredible run over the past 2 weeks right up through earnings. If you read into earnings they actually beat estimates, once you take out one time charges. Company has been buying/leasing land and increasing production. CEO has been buying a good bit of shares and management seems to be solid. If you have the time to do some DD you should be able to find whatever you need. I hope this info helps. Just an FYI...I have owned this stock in the past but exited my most recent position Friday and am also looking to get back in.

The Poni

[Carloseguan]

theponi said: ↑
MadCow,
Have you looked at CHK? I've been following this about 9 months (I believe it was featured in Smart Money Magazine in September 2007, which is where I got turned on to it) Its had an incredible run over the past 2 weeks right up through earnings. If you read into earnings they actually beat estimates, once you take out one time charges. Company has been buying/leasing land and increasing production. CEO has been buying a good bit of shares and management seems to be solid. If you have the time to do some DD you should be able to find whatever you need. I hope this info helps. Just an FYI...I have owned this stock in the past but exited my most recent position Friday and am also looking to get back in.

The Poni
Click to expand...
Yes, I am quite familiar with CHK. It was one of the first stocks I ever owned, back in mid to late 2005 during all the Hurricane Katrina mania I made quite a bit of money off of it. However, my understanding is that EOG is the most exposed to the spot price of nat gas (can anyone corroborate this?) because they are not as bound to contracts like CHK is and with the recent run of nat gas from just over $6 to nearly $10 in the last 6 months my thought process is that EOG would be the most likely to have an upside surprise. Thoughts?

[Charlesst]

What a difference a couple years makes. Nat gas went from a darling to one of Cinderellas ugly sisters.

I was thinking of ways to play this and I recall reading a statistic that said the USA is a net exporter of refined fuels including nat gas. Basically we import oil, refine it into gasoline, heating oil, and other distillates and ship it down to South America and other emerging markets. As poorly outdated as our refining infrastructure is in this country it's still worlds ahead of what they have in emerging markets.

With that being said the low gas prices make the producers like CHK a poor choice to play the shale gas revolution unless you buy one of the royalty trusts. On the other hand, you can play the exportation of natural gas. A couple names I like in this field are Chicago Bridge & Iron [CBI] and Cheniere Energy [LNG].

CBI manufactures LNG storage tanks and LNG liquefaction and regasification terminals. They provide other services to the energy sector but this is probably their most levered component to nat gas.

[Catgess]

Reduce, reuse, recycle. Just trying to keep the forums tidy and uncluttered ;).


Regarding UNG, my understanding of commodity funds like these is that if the futures curve is in contango, forward futures price is higher than expected futures spot price, these funds get crushed on the roll because the roll yield is negative when they roll over the contracts from the prompt month to the next month (I believe in the middle of the current month). These funds could make money if the futures curve was in backwardation because they'd theoretically have a positive roll yield as futures prices increased through time to meet the expected futures spot price. However, a lot of the futures markets participants know when these funds execute their rolls so they simlpy front run them to scalp a few dollars ahead of these very large movements of the funds.

I'm aware of UNL and USL which are supposed to mitigate this problem by spreading the contracts across 12 months so the fund is only rolling 1/12th of its portfolio each month but I have not studied it enough to verify if it mitigates the problem or not.

I still think the best way to play the shale gas revolution is through the distribution of gas via midstream firms and the LNG infrastructure and distribution. I still like the royalty trusts due to the large cash payouts. ECT looks beaten down because it's a low volume equity security (less than 100,000 shares a day) and only two analysts cover it. One analyst from Oppenheimer issued an underweight rating and I suspect a bunch of Oppenheimer clients sold out driving it much lower than the production and payouts project it should be. Similar thing happened to SDT back in October and look where it is now. I'd be a buyer at these levels. Once it announces a pay out of 60 cents in February it should ramp back up as the current yield would be over 12% at these levels which is simply a market inefficiency. Most royalty trusts are not yielding more than 8% or 9% so you can see where ECT's price needs to make up ground to get to this lower yield.