Coming Nat-as-trophe
Research for Online Investors

by John Dalt

12/11/09

Natural gas is back, with snow and cold blowing across the country and positive economic news points to increased usage in the future.  We predict a ‘Nat-as-trophe’

The Energy Information Administration (EIA) reports the natural gas in storage on a weekly basis.  The chart below shows billions of cubic feet (Bcf) of natural gas in storage in the continental United States.  Natural gas is a ‘local’ market due to the difficulty of transportation.  By ‘local’, we mean ‘not worldwide.’  This makes natural gas unique to other commodities, which are easily transported and moved to the market based on demand.

North America is covered by pipelines that move natural gas from Oklahoma and Texas to storage and then on to Midwest population centers.  Production in the plains and mountain states moves east to markets.  Natural gas storage is typically in underground salt caverns, these natural caverns are managed to store the gas until it is needed when demand outstrips production.

Natural gas has to pumped, or compressed, to pressurize the pipelines.  These compressor stations are located to maintain pressure throughout the system.  Below is a pipeline and compressor station map of the United States.

The U.S. has the ability to import natural gas, but with the low prices during 2009, these facilities have not seen demand for product.  They were built during the last five years when U.S. gas was higher than market prices overseas.  Some OPEC countries blow off, or burn natural gas because it is not economic to ship it for export at current low prices.

The U.S. has reached oversupply of natural gas for two reasons.  Demand has declined with the slowing economy.  In addition to use for residential heating, natural gas is used in many industrial applications, and peak demand load electrical generation.  Supply has increased due to new directional drilling techniques.  Exploration and production companies are finding and profitably producing natural gas in areas that were not considered economically viable just a few years ago.

The demand side of the equation will rise as manufacturing activity increases. We can see the possibility of this in 2010. Historically, natural gas has been used for ‘peak demand’ load electrical generation, when consumers comes home from work and turns on the air conditioners. At the present low prices, natural gas is competitive for ‘base load’ generation. The other advantage for natural gas is it burns clean. It emits less ‘green house gas’ than coal. Natural gas could supply utilities with a cheap and easy way to reduce emissions. The beauty is, even as gas prices move higher, a regulated utility can pass it along without regulatory approval as a ‘fuel cost adjustment.’

We have written about natural gas, as recently as August 21st of this year.  The reasons to own natural resource companies are stronger today.

We see a strong 2010 for natural gas, with prices doubling from the present. Some stocks we like are Chesapeak Energy Corp (CHK) and PetroHawk Energy Corp (HK). Both companies have capitalized on the latest directional drilling technology to extract gas from shale. Either company could give you an easy double when natural gas makes its inevitable move higher.

We have another company, for our Long-Term Portfolio subscribers.  I have tracked and traded their stock since 2006 and visited some of their production sites in Wyoming.  They are a first class company, that executes and keeps their eye on the ball.  You can get our next recommendation by subscribing.  It will be out in a week.  This service is a must have for any serious Long-Term Investor.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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