Time to Hop on the Natural Gas Train
By Dan Dicker - May 24, 2013, 3:11 PM CDT
With hedge funds performing miserably this year compared to the indexes, you’ve got to say that sometimes it helps to be a little stupid. Those investors who didn’t read the Q’s, ignored the warnings of slowing Chinese growth and EU double-dip recession and just blithely kept long dividend staples in Vanguard index funds have done spectacularly well.
Such a year would make Jack Bogle proud, never have we seen such a complete vindication of his hold, hold, and hold strategy as 2013.
I am a big fan of Mr. Bogle and try to keep a major portion of my portfolio under wraps and unmoving – but I’m also a trader and my career has been about improving performance based on tactical allocation and better understanding the commodity cycles – with a look to improve on mere indexes.
Such a value has emerged in natural gas, which has seen 3 years of miserable performance, but is finally poised to rise from the ashes like the phoenix. Numbers don’t lie – a cratering of rig counts and voluntary shut-ins has finally pushed storage of gas under the 5-year average – a monumental achievement. In recent conference calls from the supermajors, I did not hear any of the companies even suggest that they were going to be wooed by $4 natural gas into returning production capex from crude oil and liquids to resume drilling for natty; it seems likely that many quarters of rising gas prices will be needed…
With hedge funds performing miserably this year compared to the indexes, you’ve got to say that sometimes it helps to be a little stupid. Those investors who didn’t read the Q’s, ignored the warnings of slowing Chinese growth and EU double-dip recession and just blithely kept long dividend staples in Vanguard index funds have done spectacularly well.
Such a year would make Jack Bogle proud, never have we seen such a complete vindication of his hold, hold, and hold strategy as 2013.
I am a big fan of Mr. Bogle and try to keep a major portion of my portfolio under wraps and unmoving – but I’m also a trader and my career has been about improving performance based on tactical allocation and better understanding the commodity cycles – with a look to improve on mere indexes.
Such a value has emerged in natural gas, which has seen 3 years of miserable performance, but is finally poised to rise from the ashes like the phoenix. Numbers don’t lie – a cratering of rig counts and voluntary shut-ins has finally pushed storage of gas under the 5-year average – a monumental achievement. In recent conference calls from the supermajors, I did not hear any of the companies even suggest that they were going to be wooed by $4 natural gas into returning production capex from crude oil and liquids to resume drilling for natty; it seems likely that many quarters of rising gas prices will be needed to entice the majors back to the gas party.
There are other factors leading to a strong rebound in nat gas prices. LNG export is coming – albeit slowly. Shale wells are now reaching a level of maturity that is showing a hyperbolic decline in production returns; this chart from a recent presentation from Morgan Stanley shows the fast declines in wells in the Eagle Ford:
Commitment of Traders (COT) reports showed me that wise guy traders (like me) entered the nat gas cycle a bit early and got caught, driving prices again briefly below $4/mcf. This is a temporary lull in the nat gas rally and an opportunity.
I am a career futures trader and will continue to hold positions in very risky natural gas futures, but there are stocks you can pick up that should serve equally well. One stock finally looking ready to get on a roll is Ultra Petroleum (UPL).
This stock is highly levered to natural gas prices and has had three years of tremendous underperformance, but with a recent move up above $23 despite the natural gas swoon, it trades like a ready candidate to run, particularly if I’m right about a resumption of the natural gas rally.
With today’s stock market drop, I’m hoping to pick up shares on Ultra closer to $22 or even a bit below. This is the kind of action I like to buy, not trying to find the bottom, but grabbing shares on the way up of what I think will be a long ride.
Ultra Pete – recommended at $22.50.
