Natural Gas Companies: A Contrarian Bet on Higher Prices

The decline in natural gas stocks has been anything but natural lately.

With ample stores and cheap prices, natural gas-related equities have taken a beating and continue to be battered.

While it is always difficult to call a bottom, the tide may be turning for natural gas companies despite the latest data.

The price of natural gas fell again last week after the government reported an unexpectedly large increase in supply. To date, natural gas prices have slumped to levels not seen in 10 years.

Recent Energy Information Administration (EIA) reports reveal that the energy industry continues to deliver gas at a faster rate than Americans can consume it.

U.S. supplies grew by 42 billion cubic (Bcf) feet in the week ended March 30, pushing the country's total supply to 2.5 trillion cubic feet. According to Platts, a premier source for energy prices, industry analysts had expected supplies to grow between 33 to 37 Bcf.

With natural gas stores bursting at the seams, some of the nation's largest producers have announced plans to scale back production.

Jen Snyder, head of North American gas for research firm Wood Mackenzie, told the Washington Post, "There hasn't been enough demand to use all the supply being pushed into the market."

Where prices go from here depends a great deal on the weather.

Commodity Prices Drive Natural Gas Companies

A mild spring is forecast for most of the country, and the pleasant weather is expected to push natural gas prices even lower. A hot summer would enhance demand for the fuel as people crank up their air conditioners, requiring natural gas-fueled power plants to burn more of it.

Just this week natural gas prices continued their slide, falling below $2 per cubic foot (cf).

Prices have not been below $2/cf since January 2002. Meanwhile, oil prices have stayed high and are taking a hefty chunk out of consumers' wallets.

Even so, several industry analysts see huge potential in the natural gas sector.

According to Money Morning Global Energy Strategist Dr. Kent Moors, low natural gas prices offer great opportunity.

"First," Moors said, "the price of natural gas will rise again. It's inevitable. And there is plenty of fundamental evidence in other commodity markets as to why. It might not be tomorrow, but it's coming."

"Second, and more important, investors seem so overly focused on the near-term asset performance that they fail to recognize real long-term potential," said Moors.

That allows investors to get in on natural gas companies while they are still cheap.

Opportunity in Natural Gas Companies

Natural gas is used across all sectors. This versatile fossil fuel has myriad applications commercially, in homes, in industry and in the transportation sector.

According to the EIA, energy from natural gas accounts for 24% of total energy consumed in the United States, making it a vital component of the nation's energy supply.

Globally, natural gas consumption is also surging.

The latest data available from the Worldwatch Institute, a new Vital Signs Online report, shows that the fossil fuel has rebounded 7.4% from its 2009 slump, putting natural gas's share of worldwide total energy consumption at 23.8%.

While the largest increase in natural gas use since 2009 occurred in the U.S., the Asia Pacific region also experienced strong growth.

Demand also climbed in Russia, the world's second-largest natural gas consumer. Even the Middle East, home to some of the richest natural gas resources in the world, but lacking in the proper infrastructure to facilitate much domestic consumption, saw a rise in demand for natural gas.

Currently, Japan is increasing liquid natural gas (LNG) imports after the Fukushima nuclear disaster forced the shutdown of atomic power plants and increased its reliance on gas-fired generators.

Bloomberg reports that Japan's second biggest city distributor, Osaka Gas Co., is in talks to import LNG from a trio of U.S-based companies: Dominion Resources (D:NYSE); Sempra Energy (SRE:NYSE) and Freeport LNG LLC.

According to the Bloomberg report, Osaka Gas plans to buy more stakes in LNG projects to increase the volume it owns by the end of fiscal 2020 from 100,000 to 1.5 million tons per year.

Osaka is also in talks with BG Group Plc (BRGYY:PINK) and Gas Natural SDG Sa (GASNY:PINK) to purchase a portion of the supplies they agreed to buy from Cheniere Energy Partners LP's (CQP:NYSE) planned LNG export terminal at Sabine Pass in Louisiana.

All of this activity bodes well for the industry.

According to Moors, "The rise in demand for everything from electricity to petrochemical feeder stock, liquefied natural gas (LNG) exports and even usage in vehicle fuels, will start driving that price up over the next two years."

But Moors isn't the only analyst bullish on natural gas companies.

Michael Murphy, managing partner and CEO of Rosecliff Capital is particularly optimistic on the sector, and told CNBC that investors should prepare for a rebound.

"We have had a very warm winter that forced the shorts to jump on natural gas, but that is going to change because the weather will turn," Murphy said. "The price of natural gas may go a little bit lower before it goes higher, but if we get a real energy policy set up, we'll be able to send natural gas around the globe and these natural gas companies, and natural gas prices, will go a lot higher."

Currently considered to be a contrarian bet, it appears that now might be the right time to invest in natural gas companies.

Diane Alter, Money Morning