Hot Commodity Stocks: This Natural Gas Producer Is On A Roll…
No doubt about it, underlying natural gas market fundamentals have grown considerably more bullish since this time last year…
- Dry-gas drill rig counts have plummeted and are currently near 18-year lows.
- As of yesterday’s EIA inventory report, natural gas in storage is at 2,141 billion cubic feet (bcf). That’s 28% lower than last year and down 3.9% from the 5-year average.
- US natural gas production is slowly turning lower after hitting a high of 65.7 bcf/d on November 5, 2012.
These bullish trends have propelled the price of natural gas from $2.00 mmBtu in late April 2012 to $4.40 in late April 2013… a 120% jump.
We’ve been talking about these trends, and ways to profit from them, for a while now. As I mentioned in previous articles, the US Natural Gas Fund ETF (UNG) is one of the best ways to trade the ebb and flow of the natural gas market.
But there are other ways to profit from the rise of natural gas…
It’s not always the case, but buying stock in companies that produce this commodity may lead investors to outsized long-term investment gains.
Take Ultra Petroleum (UPL) for example…
Ultra Petroleum is one of the lowest cost producers of natural gas in the US with finding & development (F&D) costs of $1.46 per Mcfe. And as you can see from the chart above, bullish investors are already driving Ultra’s share price to 52-week highs.
Why are shares advancing so quickly?
I believe investors are finally realizing the upper-$3 to low-$4 range is likely a long-term floor for the price of natural gas.
And the fact is, Ultra has well economics that are quite favorable at these prices. In fact, the company estimates an 82% Internal Rate of Return (IRR) on their 8400 foot Marcellus wells at a $4 wellhead price.
But the best part is…
The higher the price of gas goes, the better the economics become. At $5 natural gas, the IRR from those same Marcellus wells jumps to 140%. Obviously, such a scenario would greatly improve Ultra’s profitability and drive the share price substantially higher.
So if you’re looking for alternative ways to invest in the burgeoning natural gas revolution, Ultra Petroleum should be near the top of your list.
Now let’s be clear…
Not all natural gas producers are the same. Companies in this industry took a severe beating in recent years as the price of natural gas fell. Many producers are bearing enormous debt loads and have higher cost structures than Ultra. As a result, investing in the natural gas sector should only be done with great care.
Until Next Time,
Justin Bennett
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Category: Commodities
