Is it time for Natural Gas Yet?

by Jay Pestrichelli on May 3rd, 2012

Natural gas has been a hot topic recently (yes pun intended). We’ve seen the commodity itself bounce off the low of $1.902 just two weeks ago by 18% closing yesterday at $2.257. The ETF that tracks natural gas, UGA, is also up about 13% over the same time period.
The big headline of earnings season for natural gas was Chesapeake Energy, CHK. Not only did they disappoint sending the stock down nearly 15%, but also more and more ‘questionable’ news keeps coming out about the CEO, and now former Chairman, Aubrey McClendon.
At Buy and Hedge we continue to be bullish the energy sector, and it’s hard to see an American future that doesn’t include a larger part for natural gas. Both large and small fleets have begun to convert from gasoline to natural gas. There are even conversion kits that take your current car and turn it into a natural gas vehicle. Although I haven’t done the tests myself, reports point to a much better fuel efficiency. And who knows, perhaps at that point, you just refuel from your garage vs. going to a station.

But investors have been punished for their long-term outlook on this commodity. All of the big boys like Exxon-Mobil, Chevron and BP haven’t been able to point to earnings growth for their natural gas businesses and Chesapeake’s stock price has been cut in half since its most recent highs in Feb 2011. Even the innovators in the automotive parts space like Westport (WPRT) aren’t getting the forward-looking attention it deserves. WPRT is down 40% from March settling in around $31 a share.
So is there a place for natural gas in a portfolio? The answer is yes and no. You can get some exposure in the energy ETFs like XLE and IEO. Both of which have an options market on them and allow for hedging. Until the country really adopts natural gas as an alternative to gasoline, that should be all the exposure you need.

Don't try to use UGA or the double leveraged ETF BOIL as investment vehicles. Both of these come with the risks of a commodity-based ETF and will lose ground due to the tracking error caused by contango. Trying to picks stocks in this space is just as difficult and until the movement really takes hold, it seems like the trend will continue to work against the long-term investor.

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