Friday, April 17, 2009

Why I like natural gas

The reason why I believe natural gas prices have reached bottom: because no one else does. That's it--that's my investment thesis. I own some natural gas pipelines for their high dividends, but I bought a natural gas mutual fund in my Fidelity account several weeks ago as a sector rotation play in my IRA.

Most people thought I was crazy, which was reaffirming. But the reason why I dove in? Last month, in an interview with Jim Cramer's Mad Money show on CNBC, the CEO of a natural gas company CEO was so bearish that he could not call a bottom on natural gas prices. I commend him for being an honest CEO (a rare commodity these days), but the fact that someone who should be the biggest cheerleader for his industry was so glum about his company's prospects triggered a buy alert inside of me. He went on and on about demand destruction due to the weakening worldwide economy, exploding inventories, yada yada yada.

But in between the gloom and doom, he also mentioned his company and his peers were closing down wells at record amounts, because gas prices were so low that they were bleeding cash with each drilling. In other words, due to depressed prices, there are now 50% fewer natural gas wells in production. That tells me the supply side of the equation will fix itself eventually, which means prices have to stabilize, if not rise even if demand does not return to previous levels. And if the economy does recover even slightly, prices have to rise more.

I was a couple days early from the exact bottom, but I'll take that any day of the week and twice on Sunday. I actually did the same thing by buying gold stocks in the November lows. NO investor can catch the exact bottom or top of an asset price, but if you are close, you can still capture the majority of the major trend move.

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