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North America's Greatest Natural Gas HoardsBy
Wednesday, January 12, 2011
As I've shown you over the past two days, huge forces are escalating natural gas consumption.
This demand won't cause a short-term explosion in natural gas prices. But it's a no-brainer to start hoarding the stuff right now... in advance of the coming consumption boom.
You see, the natural gas price may be at historic lows today... but it will rise again at some point. Many roads may lead to higher natural gas demand. But the simplest is this...
Natural gas is the cheapest source of clean energy in North America today.
According to the EIA, solar power costs about $4,800 per kilowatt. The cost of wind ranges from $1,800 to $3,500 per kilowatt. The cost of a natural gas turbine is just $650 per kilowatt.
On the other hand, it costs about $2.91 to buy enough coal to generate 1 million BTUs of energy. A million BTUs of natural gas costs $4.58. The tradeoff comes from the soot and pollution generated by burning coal. Natural gas combustion produces one thing... carbon dioxide. That difference will matter more and more in the future.
To quote legendary commodity investor Jim Rogers, "The best cure for low prices is low prices." Eventually, the utility of natural gas and its low cost will create demand. We simply have to be patient.
In investment terms, we want to own enormous reserves that can be produced when the natural gas rally cranks up. We want to buy companies that the market has left for dead... but that will have enormous natural gas production in the future. Essentially, we want a "call option" on natural gas.
We want to own "PUDs."
PUD stands for Proven Undeveloped Reserves. These are undrilled gas wells with zero exploration risk. Typically, PUDs are located between two producing wells or in the middle of proven fields just waiting to be drilled. We know the gas is there... The company that owns it just hasn't drilled it yet because prices are too low.
Right now, the stock market is practically giving away natural gas PUDs.
The price of natural gas is so low, investors aren't willing to pay for the future production of PUDs. Companies only get credit for current production and cash flows... Promising, nonproducing properties are selling for peanuts.
Below is a table of natural gas producers that trade on the stock market. I figured out the price of each company's PUDs per share, in thousand cubic feet (MCF) equivalent increments. We want to buy massive amounts of PUDs as cheaply as possible.
Since I first showed you this table in November, prices have climbed. But it's just a fraction of what could happen if natural gas heads up from $4 to $6 or $8 in the coming years. If that happens, these assets will skyrocket in value.
The best resource investors I know are slowly building up a portfolio of the best undeveloped reserves they can find. Now is the time to buy, when the market hates natural gas. With a little patience, your investment will double or triple over the next few years.
Good investing,
Matt Badiali
Further Reading:
Today, many developed countries are turning to natural gas for a "greener" way to produce electricity. Cheap, clean, and abundant, the U.S. government loves it... And with increasing Westernization, "Chindia" is consuming more and more of the stuff.
Market NotesA HUGE "CHINDIA" TREND THAT WILL LAST FOR YEARS A small edit to our "buy coal" advice from last fall... Make sure it's American coal...
The "buy coal" thesis is simple: Giant developing nations like China and India ("Chindia") are relatively poor compared to the U.S. But these Chindia folks are working their tails off to live "richer" lives. This involves burning a lot more coal to make steel and produce the electricity that lights up factories, cell phones, refrigerators, computers, and televisions. Neither nation can meet its surging needs with domestic supplies.
Last week, catastrophic floods struck Australia, one of the world's largest coal-producing countries. The floods "shut in" a giant chunk of the world's coal production. This is a terrible tragedy for the Aussies... But it has the side effect of making non-Australian coal assets much more valuable.
As you can see from today's chart of the big, mostly non-Aussie, coal investment fund (NYSE: KOL), this new development has helped push along one of the biggest trends in the world... the increasing value of coal producers and their assets. While this big trend is due for a short-term breather, it's one that will grind higher for years.
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