Natural Gas

Today my topic is investing in Natural Gas (NG) using Natural Gas sector Exchange Traded Funds (ETFs) and why NG may be a good investment. I already own two Canada Trade Corporations that produce NG and Oil, Penn West Energy Trust (PWE) and Pengrowth Energy Trust (PGH) both of which have paid a high monthly dividend. I also own Advantage Oil and Gas Limited (AAV) which was a Canada Trust but has converted to a corporation. (Canada is in the process of changing their Corporate trust tax laws; in the next couple years almost all Canada Trusts will convert to non-trust corporations,)

NG is an extremely important source of energy for reducing pollution and maintaining a clean environment. NG is the cleanest of the fossil fuels - much cleaner than coal and oil. For a long time, until the 1950s, it was regarded as a useless by-product of oil production. It now provides 23% of all the energy used in the world and demand continues to grow. The major difficulty in the use of natural gas is transportation and storage due to its low density. Natural gas pipelines are economical, but are impractical across oceans. There is also a foreseeable shortage of pipeline capacity in the US and it is difficult to go over high mountains because of NG’s low density (particularly problematic for California).

NG is also important because it is abundant in the US and Canada which is why we import very little of it. The US has the 6th biggest reserves in the world. Russia has the largest reserves in the world and exports a lot of NG to Europe. Europe has very little NG and that’s why France and other European countries are building nuclear power plants so as not to be dependent on Russia for their energy. The more the US uses NG for energy, the more it helps with the import / export balance of payments and reduces US dependency on OPEC countries.

There is lot of good information available on the T. Boone Pickens website about the Pickens Plan and how NG could improve the environment and help the US get off its oil dependency: http://www.pickensplan.com/theplan/. Some of the highlights from the Pickens Plan:

“By aggressively moving to shift America's car, light duty and heavy truck fleets from imported gasoline and diesel to domestic natural gas we can lower our need for foreign oil - helping President Obama reach his goal of zero oil imports from the Middle East within ten years.

Nearly 20% of every barrel of oil we import is used by 18-wheelers moving goods around and across the country by burning imported diesel. An over-the-road truck cannot be moved using current battery technology. Fleet vehicles like buses, taxis, express delivery trucks, and municipal and utility vehicles (any vehicle which returns to the "barn" each night where refueling is a simple matter) should be replaced by vehicles running on clean, cheap, domestic natural gas rather than imported gasoline or diesel fuel.”

With the advantages of NG over other fossil fuels so obvious, it should drive up the overall demand for NG and increase the revenue, profitability and stock prices of NG exploration, production, equipment and service (for example, companies that run NG pipelines) corporations. New technology over the last year has unlocked trillions of cubic feet of natural gas in the US and Canada, meaning energy producers do not have to deal with difficult political environments overseas. Major oil companies have started to do Merger and Acquisition of NG companies in an effort to increase their NG business component. For example, Exxon Mobile bought XTO Energy for an all-stock deal of $31 billion to increase their play in NG. Will other major oil companies like Chevron, Shell, BP, etc. follow suit and buy NG corporations? If the answer is yes, it will increase the stock price of NG corporations.

There are a number of Oil and NG exploration & production index ETFs, for example, FCG, IEO and XOP. These are all low net assets (less than $450 million) ETFs with $.30 bid / ask spreads for FCG and XOP and $.90 bid / ask spread for IEO. The turnover is very high for FCG (you may only want to buy FCG in a tax exempt account). FCG had the highest growth for 1 year of 41.92% but the highest expense of $.60. I will add FCG and IEO to my blog watch list.

If you are interested in investing in leveraged Oil and NG ETFs there are two (which have the same advantages and disadvantages of derivative investing that I will be blogging about next week).

- Ultra Oil & Gas ETF (DIG) targets returns that are 200% of the daily performance of the Dow Jones U.S. Oil & Gas Index.

- UltraShort Oil & Gas ETF (DUG) targets returns that are 200% of the inverse of the daily performance of the same index.

Next week, I will write about how derivatives work and their advantages and disadvantages. Should you be investing in derivative ETFs? What are the rewards and risks of investing in these ETFs? Future topics may include:

- Shorting US currencies

- What sector will do the best in 2010?

- Update on performance of blog trades

- Other topics

In April I will be starting a financial website and in the summer I will be kicking off a financial podcast with Fullstacks and Mr. C (need to talk with him).

Please add your insight. I would like to have an on-going discussion of financial and investing ideas.

Paul