Natural Gas Investing: Higher Prices Are Coming…

| July 21, 2011 | 0 Comments

Natural gas prices are in the cellar.  And they’ve been that way for quite some time.  But now, I’m seeing an opportunity to profit from natural gas… I’ll tell you about it in a minute.

But first, I’m sure you’re wondering why prices are so low.

Advances in drilling technology are revolutionizing the natural gas industry.  Exploration companies are unlocking huge gas deposits deep beneath the earth’s surface.

And according to industry experts, the US is sitting on a 100-year natural gas supply.  Of course, that abundant supply has natural gas prices trading near decade lows…

As you can see, natural gas has been trading around $4 mmBtu for nearly two years.  Clearly, the current natural gas oversupply situation is a big headwind for higher prices.

What’s more, some energy analysts suggest natural gas prices will stay at these levels for many years to come.

But I don’t think that will happen…

Recent transactions suggest the big players in the energy industry are moving towards the clean burning alternative to diesel and gasoline.  And that means natural gas consumption is going to pick up quicker than anyone expects.

What deals am I talking about?

First of all, Chesapeake Energy (CHK) recently announced they’re investing $150 million in Clean Energy Fuels (CLNE).  The investment will help fund the development of CLNE’s natural gas fueling stations along major US trucking corridors.

The deal is a sign natural gas producers are looking to create a “demand revolution”.  Higher demand means higher natural gas prices.  And that means more profits for producers.

But that’s not all…

It’s also an obvious sign the trucking industry will shift away from diesel… and towards natural gas.

Why would they want to do that?

Volatile prices have oil trading near $100 a barrel these days.  And that has diesel prices holding at lofty levels around $4 a gallon.  Since diesel is the mainstay fuel for heavy-duty trucks, trucking companies will benefit greatly if they can run on cheaper natural gas.

How much could they save by switching to natural gas?

One industry expert suggests truckers could save around $2 a gallon.  The potential savings can be measured in the billions!  Not only would that help truckers’ bottom lines, it would help wean the US off OPEC oil.

That’s a win-win situation if you ask me…

All truckers need is the fueling infrastructure along interstate corridors to make it feasible.  Once these stations are in place, trucking companies will switch to natural gas engines.

But that’s not the only deal with big implications for natural gas…

BHP Billiton (BHP), the world’s largest mining company, just announced they’re buying Petrohawk Energy (HK) for $15.1 billion.  The all cash deal represents a 65% premium over Petrohawk’s July 14th closing price.

Petrohawk is a leading US natural gas explorer with sizable holdings of prime natural gas properties in Louisiana and Texas.  Clearly, BHP wanted to expand their natural gas assets… and they were willing to pay handsomely to do it.

That means huge natural resource companies like BHP must see big potential in natural gas.  And they’re looking to invest in the industry now… while natural gas prices are at the lows.

How can you profit from this big switch to natural gas?

Take a look at companies like Fuel Systems Solutions (FSYS) and Cummins (CMI).  Both these companies are in the natural gas fuel systems business.  As the heavy transportation industry pushes towards natural gas, these companies should see business explode.

But there’s more…

You can also invest in companies bringing gas to the surface.  BHP was willing to pay a 65% premium for HK’s natural gas assets.  And that means other producers in the space may be wildly undervalued at current prices.

Companies like Southwestern Energy (SWN), Pioneer Natural Resources (PXD), and Rosetta Resources (ROSE) are worth keeping on your watchlist.  They might make great takeover targets for other industry giants!

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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