HardAssetsInvestor

Written by Julian Murdoch  |

December 20, 2010

Is Now The Right Time To Buy Natural Gas Stocks?

Details

Unlike natural gas itself, equity-based FCG and WCAT have both had stellar years. What does their future hold?

 

Looks like those great gains we've seen in crude oil haven't translated to natural gas. In fact, natural gas will close out the year as one of 2010's biggest losers, because ample supply has continued to tamp down prices. Inventories remain high, although, as a rule, they also tend to be highly cyclical, as seen in the chart below:

 

 

Of course, the chart above doesn't describe consumption, and that's ticking back up: The most recent EIA Natural Gas Weekly Update references a report by BENTEK Energy LLC, which states that overall consumption of natural gas has increased by around 6 percent compared with the same period in 2009. Recent cold snaps in the Southern U.S. and Europe have helped push demand back up in the short term as well.

Unfortunately, the increased consumption just wasn't enough to compete with the amount of supply both in storage and coming out of wellheads.

So with prices as depressed as they are, how have natural gas companies fared?

It would be easy to assume that, with the price of their product depressed, the natural gas companies would see their share prices plummet, but that just doesn't seem to be happening.

In fact, quite a few natural gas companies have had amazing years—not only vastly outperforming natural gas (though it doesn't take much to do that), but logging gains of over 50 percent and more.

Two ETFs that offer coverage of natural gas companies are FCG and WCAT.

FCG is First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG), which pulls 30 companies from the ISE-Revere Natural Gas Index, according to methods detailed on its website, including requirements mandating a certain level of natural gas proven reserves. Meanwhile, WCAT is the Jefferies TR | J CRB Wildcatters Exploration & Production Equity ETF (NYSEArca: WCAT), a relatively new energy ETF that, as of the end of November, allocated 60 percent of its portfolio to natural gas companies.

Both ETFs have done fairly well for themselves, especially if you compare them with the United States Natural Gas Fund (NYSEArca: UNG).