When I wrote convincingly last July about the coming turnaround in Nat gas prices I did a great job in recognizing the trajectory of storage and the slow but steady drop of surplus in Nat gas that would lead to a 3rd and 4th quarter rally.
Unfortunately, instead of just recommending the commodity itself, I tried to find stocks that I felt were so closely levered to the price of natty that they would respond to what has been a big move from around $3.40/mcf to today above $4.10/mcf. Again, unfortunately, the stocks I gave including EnCana (ECA), Ultra Petroleum (UPL) and Devon (DVN) have refused to respond to the move as I had expected and the reason has been clear: While Nat gas has rallied, the production where these companies are levered has been drying up.
Related article: Chevron Lands Million-Ton LNG Futures Buy in Australia
That’s been a function of both the shut-ins, and massive rush to liquids drilling that any company capable has been frantically attempting to accomplish in the last two years (Devon being a good example) and the needed drop in production that has been forced upon over-leveraged companies dealing with a depressed price (see Exco and Ultra).
It has been instead in the Marcellus with continuing production increases where the price rise in Nat gas has translated to booming stocks: Cabot Oil and Gas (COG), Range Resources (RRC), Southwestern (SWN) and EQT Corp. (EQT) being four companies whose share price has been screaming.
As I expect Nat gas prices to continue their rise to $4.50 and perhaps beyond, I’m not going to be fooled again.
First, I’m going to get long the futures directly. If Nat gas has another 50 cents of rally in it, I want to participate. I’m looking at August e-minis traded at my old home on the NYMEX.
Related article: How to Buy Your Own Shale Boom
I also want to have stocks that will directly benefit, but Marcellus stocks have been just too strong for me to jump on here. Above 100 P/E ratios in Cabot just make these momentum plays scary, even for a lifetime futures trader. Still, in the bunch of Marcellus stocks, I believe EQT Corp. to be the best value having “only” rallied from around $60 to $70 since the late 3rd quarter of 2012.
I’m also looking at other “plays” to see some value. With Haynesville rigs down to little more than a dozen and other ‘established’ plays equally depressed, I need something else – perhaps in the Wattenberg and Niobrara (leading me back to Noble (NBL) and Anadarko (APC), perhaps in the Permian (taking me back to old trading friend Cimerex (XEC).
The point is that I’ll want a mix of stocks and futures for the next Nat gas run.
And hopefully, as the old “The WHO” song goes – “We Won’t Be Fooled Again”.