HardAssetsInvestor

Written by Brian O’Connell  |

June 04, 2012

Drilling For Natural Gas Returns: Stocks & ETFs Vs. Futures

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A perennial underperformer, natural gas is attracting attention again, from Main Street to Wall Street.

As domestic natural gas production has reached record heights over the past few years on the back of high-tech “fracking” methods, natural gas prices have in turn been in a free fall, taking investment returns with it.

But the mood about natgas and its potential returns have been revived with a rally this spring that saw prices surge more than 40 percent. But reality is settling over the markets again.

Natural gas prices have fallen below 2.40/mmbtu this week, giving back about half their spring rally. Investors, though, are putting the energy commodity on their “watch” list, just the same.

This newfound attention is a stark contrast to the recent past.

For years, natural gas investors were akin to parched drifters, traversing the Sahara Desert, hoping against hope that the pool of water on the horizon isn’t a mirage, and that a nice, cool drink is only moments away.

Unfortunately, the natural gas market has been more mirage than manna from heaven for investors, as natural gas prices have dried up — and then some.

Consider this track record . . .

• Prices − Natural gas prices had fallen precipitously since 2008, when the Great Recession started. Natural gas futures prices fell to $1.94 in April, a four-year low, from $12 in April.
  
  
• ETFs − Natural gas exchange-traded products, like the United States Natural Gas (NYSE Arca: UNG), have produced abysmal results for investors. UNG is trading around $19 in late May, down from a 52-week high of $50.52. Its year-to-date return is -38.39 percent, but even that figure looks better than its three-year average return of -49.22 percent.

• Stocks − Natural gas stocks, as exemplified by major producers like Chesapeake (CHK) and Encana (ECA) are off significantly so far in 2012. Chesapeake has seen its share price fall by 40 percent since March 1, while Encana fell to a yearlong low of $17 per share in late May, and is trading at $19 per share in the first week of June.