This Natural Gas Play is Practically "Political Proof"
If this is the best democracy can do, we are in big trouble. For the first time in 17 years, Washington DC has “closed up” shop.
Of course, you wouldn’t know it from the markets…
In the wake of the latest round of Congressional stupidity, the stock market has been unusually steady. As I write this, the DOW is up over 57 points.
But you can be sure that the longer this circus drags on, the more it will begin to weigh on the markets.
After all, October has a history of being the most trying month for investors. The last thing it needed was a government shutdown.
However, that doesn’t mean your only option is to sit on your hands. In fact, have an investment for you that is just about “political proof.”
It’s a money making opportunity in natural gas…
What to Do When the Government Does the Unthinkable
Of course, as I wrote in last Thursday’s column, there will be plenty of opportunities for investors if the government does the unthinkable.
Now that it has actually come to that, there are still two “contrarian” plays investors can make in a market slide caused by the shutdown. They include investments in utilities and smaller, well-run, well-focused oil and gas production companies.
After all, the need for energy does not disappear simply because dysfunctional politicians have decided to sit in the corner and hold their breath until they turn blue.
But the truth is our options hardly end there-especially when it comes to natural gas.
That’s because we are now moving into the winter heating season and that always puts an added premium on the available natural gas. And thanks to the revolution underway in unconventional production (shale and tight gas, coal bed methane), we seem to have plenty these days.
In fact, the U.S. now has enough recoverable gas reserves to increase production some 25% each year into the foreseeable future.
Now in the past, increasing production also meant the threat of a supply glut. But what investors need to understand is that today’s companies are not about to let happen since it would destroy their pricing.
What’s more, this isn’t just a heating story. Other demand venues for natural gas are rapidly accelerating.
I have discussed them in OEI before. They include:
- A concerted move from coal to natural gas for electricity production;
- The rising use of natural gas as feeder stock for petrochemicals;
- Our increasing industrial needs, including the use of liquefied natural gas (LNG) and compressed natural gas (CNG) as transport fuels;
- And the biggest change coming of them all: the export of LNG from the U.S. and Canada to exploding global markets.
The New Demand Curve Means Higher Prices
All of these new developments mean this year’s natural gas demand curve will look somewhat different from the past.
Of course, we will still be taking our price bearings from how cold the winter is across most of the country. Yet, it will be important to recognize there will be additional demand coming from other quarters and that bodes well for the price of natural gas.
In fact, my natural gas price estimate into mid-2014 comes in at about $4.36, while most other analysts are moving their figures closer to $5. At the moment, we are currently seeing a price of around $3.65 per 1,000 cubic feet (or million BTUs), the NYMEX futures contract unit.
This projected rise in prices will encourage additional production. And at the same time, it will open up an attractive move for investors even with (actually in spite of) the games Washington DC is playing.
This “political proof” investment targets midstream service providers, not the actual producers. These companies include pipelines, gathering facilities, initial processing plants, storage, compressor stations, and terminals.
All of these services are the environment of Master Limited Partnerships or MLPs, a very popular way midstream assets have been packaged to maximize gains for investors.
The Advantage of “Political Proof” Investments
An MLP has the advantage of moving profits directly to partners, avoiding corporate taxes. When an MLP decides to float a share issuance to retail investors, it is essentially transferring a percentage of its profits to the holders of common shares. This is the reason MLPs usually carry better dividends than stocks as a whole.
The downside of MLPs emerges when the price of natural gas is declining. Since the primary assets in most of these partnerships are pipelines, they benefit both from the transiting of volume and from its storage. Much of the aggregate pipeline capacity in certain regions of the U.S. is actually used for storage not for transport.
An MLP, therefore, benefits from a producer both having to move and store production. On the other hand, a declining natural gas price will prompt declining production. That places pressure on MLP profits along with their share value.
However, as I discussed earlier, this scenario is not developing today. Even with the impact a prolonged government shutdown may have on the economic recovery, the demand for natural gas will be increasing.
That’s bullish for MLPs.
In fact, just yesterday we got a brief snapshot of what may be in store for MLPs. While the markets where generally pounded by the uncertainty over the federal budget, most MLPs moved higher. For investors, this will require a focus upon selected partnerships.
But that won’t be the only way to profit. We may well have another contrarian play developing here.
And if Congress and the White House continue to misbehave, we just may have another way to augment our returns regardless of what happens on either end of Pennsylvania Avenue.
In the meantime, let’s hope everyone involved realizes a system of publicly accountable government requires compromise to survive–not ideological crusades.
And let’s remember that the budget impasse will be “resolved” in due course. Neither side really wants to win the race to stupidity.
PS. I have the scoop on an overseas deal that will rocket no matter what happens with the government shutdown. After five years, the “gag order” on a $175 trillion oil and gas deal I’ve been working has finally been lifted… now one stock is about to go ballistic. Go here for all of the details.