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AGL Resources (GAS) is A Risk Worth Taking

When the price of oil was in freefall it understandably captured a lot of attention. The same fate befalling natural gas, however, was of less interest to most media outlets. In many ways that is understandable; the price of natural gas has a much less direct effect on the vast majority of consumers than that of oil, so stories about it don’t drive ratings. The fact is, though, that the decline in natural gas prices was, if anything, more spectacular.

When oil was in full decline from September to December of last year natural gas prices held up pretty well, supported by natural demand during a cold winter and the prospect of increasing usage as the current U.S. administration demanded a shift to “cleaner” fuels. Eventually, however, the oversupply that was part of the problem for oil and was, if anything worse for natural gas, caught up.

According to the EIA’s April Short Term Energy Outlook, U.S. gas consumption is set to cycle within the recent range, while supply is set on a steady upward path.


Given that natural gas, unlike oil, can be exported from the U.S., increased supply here is less of a problem than it is for crude, but a lack of infrastructure means that export volume is limited. With gas prices this low there is not much incentive to invest in that infrastructure, which could mean that midstream and downstream gas companies are moving into a period of increased pricing power.

Companies such as AGL resources (GAS) who store, transport and retail natural gas can take advantage of that situation. GAS has been a disappointment to investors recently, as they have missed estimates in each of the last four quarters, which makes it, on the surface at least, an unlikely candidate for buying before Q1 earnings are released next Tuesday. Investors who are not too risk adverse, however, may benefit from doing just that.

After a bad run like that many estimates have been revised downwards and expectations are low. That leaves plenty of room for a positive surprise and should limit the downside if GAS misses again. Even if that should happen, some positive forward guidance from management based on the midstream and storage business would cause a pop in the stock. The chart for GAS looks pretty dismal too, but this is not a company in existential trouble. They continue to make money and show positive free cash flow, and they provide a product that is growing in popularity thanks…




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