Playing Higher Natural Gas Prices With ETFs

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December 6, 2012 12:16pm NYSE:UNG

Tony Daltorio: After natural gas prices hit a decade low in 2012 of below $2 per million BTU, they’re up about 80% from a year ago, trading around $3.60 this week. 

Looks like the six-and-a-half year bear market in natural gas maybe be coming to an end.

Falling with natural gas prices has been related investments. That means investors can go shopping now for low-priced natural gas plays before prices climb.

As Money Morning Global Energy Strategist Dr. Kent Moors said, the road to profits will not be straight up. Volatility will cut in both directions.

But the natural gas market is getting stronger.

Why to Expect Higher Natural Gas Prices

One of the biggest reasons now for an expected natural gas price rise is the cold winter we’re about to enter.

“This one will be colder than last year, nationwide,” said Moors. “A colder season ahead is an almost statistical certainty. The likelihood of having a repeat of last year’s mild winter is quite low.”

Matt Rogers, president of Commodity Weather Group LLC, said in October the weather would be colder than last year from December-February. In fact, he forecast an increase of 13% in natural gas demand over the same period last year.

Looking beyond this winter, an expected increase in U.S. liquefied natural gas (LNG) exports starting in 2014 likely will contribute to higher natural gas prices, as Money Morning noted.

Moors also pointed to a shift from coal to natural gas for U.S. electricity generation.

More than 30 gigawatts of coal-fired generation will be coming offline because of new non-carbon emission requirements from the U.S. Environmental Protection Agency.

Another 90 gigawatts of coal-fired power will be taken offline by 2020 because of the age of the facilities.

The CEO of Royal Dutch Shell PLC ADR (NYSE:RDS.A), Peter Voser, is also bullish on natural gas prices in the second half of this decade. He expected prices to at least double or trip from the lows seen earlier this year.

In a May interview with the Financial Times, Voser said natural gas demand in the United States would rise “as coal is replaced by gas in electricity generation, and gas in transportation takes off.”

In addition, he said, current low prices would curtail production from some producers, allowing the price to gradually rise.

Play Higher Natural Gas Prices with ETFs

The easiest way for investors to participate in the resurgence of natural gas is to purchase shares in one of the exchange-traded funds (ETFs) that focus on natural gas.

The largest and most liquid of these, with a market cap in excess of $1 billion, is the United States Natural Gas Fund LP (NYSEARCA:UNG). It tracks the price of the commodity quite closely through the use of futures and options on natural gas.

A second ETF that uses a similar strategy is the Teucrium Natural Gas Fund (NYSEARCA:NAGS). However, this ETF is more thinly traded.

Another way to play higher natural gas prices is with Linn Energy LLC (NASDAQ:LINE).

Linn Energy is an independent oil and natural gas producer with energy assets spread across the central U.S. The company’s assets include proved reserves of approximately 3.37 billion cubic feet of oil equivalent, having a reserve life of more than 18 years.

But here’s the thing.

Linn has 100% of its natural gas production hedged above $5 through 2017, guaranteeing price protection and predictable cash flows for the next five years.

On top of that Linn is paying out a healthy 6.9% yield and sports an ultra-low Price/Earnings (P/E) ratio of 8.95, making it one of the must-own natural gas stocks for 2013.

With natural gas prices expected to climb, these investments could be some of the most profitable long-term plays over the next few years.

Written By Tony Daltorio From Money Morning

Your Guide to Financial Freedom. We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the “flattening of the world” continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet. And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.

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