Unconventional Natural Gas Investments

Keith Kohl

Written By Keith Kohl

Posted March 8, 2010

Editor’s note: For more updated information from Keith Kohl on Shale Gas Stocks, click here…


That’s how I’ve been describing natural gas prices lately.

Then again, did you really think prices were going to jump? The last EIA inventory report showed a lower-than-expected decline. Even though demand rose modestly over the last several weeks, the 116 Bcf drawn from U.S. working storage was still viewed as a bearish sign. Analysts were expecting a larger draw of approximately 132 Bcf.

As you can see below, prices recovered slightly during the fall and winter seasons:

natural gas futures march 8%2C 2010

The question now is whether the momentum that natural gas gained during the last seven months is lost or not.

Unfortunately, things aren’t looking much better over the short term.

Believe me, I’d like nothing more than to tell you that all our troubles have passed and it’ll be smooth sailing from here on out.

But that just isn’t the case…

There are only 3 weeks or so before inventory withdraws stop happening. This is when heating demand begins to taper off. Barring any unforeseen storms, there’s not much else to keep prices from falling lower. Honestly, I would have bet on prices trading above $6/Mcf, especially after the rough winter season in the northeast U.S. I guess digging yourself out of three feet of snow over and over again will do that to you.

But while playing natural gas picks like United States Natural Gas Fund (NYSE: UNG) feels more like a suicide trade over the short term, it’s not the basement prices that we should be focusing our immediate attention on. Preparing yourself for the inevitable recovery is a much better option.

Without the cold weather pushing folks to crank up the heat, what can we expect to rescue natural gas prices?

Don’t Give Up On Demand

Over the next two months, I wouldn’t be surprised to see natural gas in the low $4/Mcf range, even threatening to drop further. If nothing else, it’s going to be a perfect chance to buy at the bottom.

I wouldn’t throw in the towel just yet.

The 3% demand increase compared to a year ago may not be enough to jump start prices, but it’s a start. The EIA is expecting a tighter market through 2011. As the market works itself of this glut, we’re going to continually see increased drilling activity.

According to Baker Hughes, drilling activity in the U.S. rose this week. The number of rigs drilling for oil and gas in the U.S. increased to 1,396 — 23 more than the previous week. Twenty-one of those rigs were for natural gas. In case you were wondering, more than 68% of the total number of rigs were drilling for natural gas.

Of course, I’m not the only one with a strong outlook for natural gas. What’s interesting, however, is that we’re going to have a front row seat to the next shale gas boom. Now, I’ve talked about several prominent U.S. shale basins previously.

Today, there’s even more reason to get excited over the unconventional gas plays that have sprung up within the last few years.

Follow the Leaders…

I know what some of you are thinking: Perhaps it’s better to take a ‘wait and see’ approach to unconvential natural gas.

But you need some assurance that these unconventional gas fields are on the rise, just watch the big oil and gas companies scramble to get their piece of the pie.

Call it unconventional wisdom if you will, but the major players have made it known that shale gas is on the big thing. They’re aggressively going after the remaining unconventional hydrocarbons in the U.S.

Naturally, the immediate deal that comes to mind is the latest $31 billion deal between Exxon and XTO (Exxon will also assume $10 billion in XTO debt).

In today’s natural gas climate, it’s not about the short term. Exxon knows this. In the long term — maybe five or ten years down the road — this was a smart play by Exxon.

On the heels of the Exxon-XTO deal was another giant oil company. French oil company Total shelled out $2.25 billion for a 25% stake in Chesapeake’s Barnett assets. According to the deal, Total will pay out $800 million, as well as $1.44 billion to finance drilling operations in the Barnett through 2012.

Another oil supermajor, BP, is also making its move into the U.S. shale plays. In 2008, the company struck a $1.1 billion deal for Chesapeake’s assets in the Fayetteville shale.

Recently, however, BP recently announced another deal. This time it’s with Lewis Energy. BP is looking to grab a 50% stake in approximately 80,000 acres of the Eagle Ford shale. I’ve covered the Eagle Ford Shale formation in the past, and it also happens to be one of my favorite up-and-coming shale plays in the U.S.

Not convinced yet?

Last month, Schlumberger Ltd. announced an $11 billion all-stock deal for Smith International. Schlumberger CEO Andrew Gould reiterated their bullish stance on unconventional oil and gas, saying: “There isn’t any doubt that long-term shale gas is going to be one of the big new energy sources both in the U.S. and overseas.” Smith International brings a wealth of shale gas drilling knowledge to the table.

If one thing has become obvious from these companies scrambling hand over fist for their own stake, it’s that shale gas will become a game-changer over the next few years. You’ll be able to take that to the bank.

In fact, some of you already have. My readers at the $20 Trillion Report have been riding those shale profits for years. And the best part is that it’s a lot easier than you think. If you’re interested, feel free to read about one shale opportunity in this free bonus report.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

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