3 Ways to Play the Coming Natural Gas Rally

by Tom Taulli | July 18, 2011 11:08 am

For the past couple years, natural gas has been a dud for investors. A big problem has been the surge in production, which has been driven by new innovations like fracking and horizontal drilling.

Yet this may be short-term noise. According to a report from International Energy Agency, natural gas is poised for a golden age — with at least a 50% spike in demand by 2035.

Why the growth? There are many key factors: First, there will be a continued focus on energy sources that have lower carbon emission levels. What’s more, demand from China, India and other emerging economies should remain strong.

In addition, as seen with the Fukushima nuclear implosion in Japan, natural gas looks fairly safe. Consider that Germany recently said it will shut down 17 of its nuclear power plants.

As a sign of the importance of natural gas, just look the deal-making in the sector. Back in 2009, Exxon Mobil (NYSE:XOM[1]) shelled out $41 billion for XTO. Then a year later, Chevron (NYSE:CVX[2]) acquired Atlas Energy for $4.3 billion.

The most recent deal came last week – BHP Billiton (NYSE:BHP[3]) agreed to pay $12.1 billion for Petrohawk Energy (NYSE:HK[4]). The bid was at a 61% premium, coming to a rich 18 times earnings before interest, tax, depreciation and amortization.

As a result, there was a big rally for natural gas stocks. Here are some natural gas names that still look attractive:

EOG Resources (NYSE:EOG[5]): The company produces much of its natural gas in North America, but it also has operations in other areas like the U.K. and China. EOG is a leader in unconventional sources of natural gas. This means extracting the resource from shale. It has proven reserves are 11.7 trillion cubic feet.

Unlike other natural gas operators, EOG has been fairly conservative with its debt structure. The result is that the company has more flexibility for deal-making. But in light of its attractive assets, it would not be a surprise to see it being acquired.

Energy Transfer Partners (NYSE:ETP[6]): This is a publicly traded partnership, which provides some hefty tax benefits. Because of this, the dividend yield tends to be quite large. In the case of Energy Transfer, it is 7.4%.

The company operates major pipelines for natural gas, with a focus on Texas. The network is more than 17,500 miles in size, and the company serves the needs of 1.2 million retail customers.

It is a great business that results in strong cash flows.

U.S. Natural Gas Fund (NYSE:UNG[7]): If you do not want to play stocks, you can try this ETF. It is based on the movements of the price in futures for the Henry Hub contract. This is the main benchmark for trading and it’s quite liquid. However, the volatility can still be substantial.

Tom Taulli’s latest book is “All About Short Selling[8]” and he has an upcoming book called “All About Commodities[9].” You can find him at Twitter account @ttaulli[10]. He does not own a position in any of the stocks named here.

 

Source URL: https://investorplace.com/2011/07/3-ways-to-play-the-coming-natural-gas-rally/

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