Sunday, 6 May 2012




Dear Daily Crux reader, 


Of course, it's also causing the price of natural gas to crash. Over the last year, the price of natural gas has plummeted from over $4 to near $2. This unprecedented drop has left many investors wondering what to do… Is it time to buy? Or could there be even more downside to come? 

To get some answers, we sat down with our friend and colleague Frank Curzio. Frank is the editor ofSmall Stock Specialist and the host of S&A Investor Radio. He has been following natural gas closely for years… and his readers have made some incredible gains in the sector.

If you currently own natural gas stocks or have been thinking of buying now, this week's interview is required reading.

Good investing, 

Justin Brill
Managing Editor, The Daily Crux 
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The Daily Crux Sunday Interview 
What you need to know about natural gas now… 
  
The Daily Crux: Frank, as most readers know, natural gas has been crushed over the last year. Can you give us your thoughts on the sector now? Do you see a bottom anywhere in sight? 

Frank Curzio: Unfortunately, I don't. Natural gas could run a little bit higher here, but I just don't see signs of a long-term bottom yet when I look at the numbers.

We just got the latest natural gas inventory report from March. It showed that we're now sitting on a record-high supply for this time of year. We've got 47% more than we had in storage a year ago. Natural gas storage facilities are near 60% capacity. To put that in perspective, it's the first time in five years that the U.S. has been above 44% of capacity in mid-March.

What this means is despite prices being at 10-year lows, companies are still not cutting back production enough. So prices will likely stay low – under $2.50 – much longer than anyone expects.

Before we can see prices begin moving up, we need this huge supply to come off the market. But what many people are missing is that there just isn't enough demand for natural gas right now… And I don't think there will be until we're able to start exporting it. That's probably four or five years away.

For example, even if every heavy-duty truck converted its engines from diesel to natural gas, that would only use up another 3 trillion cubic feet of natural gas a year… which is just a fraction of the 24 trillion cubic feet we currently use each year… and the 100-plus trillion cubic feet we have in storage right now.

On the electricity side, many companies have already made the switch from natural gas to coal… And it's still not making a dent.

So as much as I'd like to say this is just a cyclical trend and prices could rebound soon, I think this is more structural. I really believe the days of $4 natural gas are gone. I don't think we're going to see that again for a very long time.

Crux: The big drop in prices this year has really hit the natural gas producers. What are your thoughts on these stocks now? 
 
Curzio: I actually recommended a few of the producers about 18 months ago. My early predictions were that gas prices would bottom out at around $2.75 to $3. I didn't predict $2 until about nine months later, when I got a look at the numbers and saw that companies – even though we had record supplies – were not cutting production.  

Now, there's a good reason for that, and I think Rick Rule explains it best: Most of the costs associated with drilling are upfront. The companies have already paid for these wells, so they're trying to recoup as much capital as possible, even if it means selling at uneconomical prices.

So it could be tough for the producers for a while. If you absolutely must buy a stock in the sector, my favorite name in the space is probably Apache (NYSE: APA). It has a strong balance sheet, and it's branching off into things like using natural gas as a transportation fuel. Just be prepared for a lot of volatility.

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Crux: Natural gas producers have been crushed, but many of the related small-cap stocks – like companies that build natural gas engines or ship natural gas – have soared. Are you bullish on any of these "picks and shovels"-type stocks now?

Curzio: Many of these stocks have done very well. We were able to get in early on names like Westport Innovations (Nasdaq: WPRT) and Chart Industries (Nasdaq: GTLS). Unfortunately, we did miss out on others. They ran up before I had a chance to recommend them in Small Stock Specialist.

One of the best performers has been Cheniere Energy (AMEX: LNG), which is building plants to export liquid natural gas (LNG). It's one of the only U.S. companies with a license to export natural gas. It wants to export to places like Asia and Europe where natural gas prices are 200%-300% higher.  

Some other stocks I like that have done well are Clean Energy Fuels (Nasdaq: CLNE), which supplies natural gas fueling stations in the U.S… and Calpine (Nasdaq: CPN), a natural gas power company.
 
We were able buy Westport Innovations, which builds fuel system technologies that allow engines to run on natural gas, at $15. And it went all the way up to $50 before pulling back and stopping us out for a 130% gain.

Because most of these stocks are up so much, you'll want to be careful with your entry prices if you're interested in buying now.  

For example, let's take Cheniere Energy… It's currently trading around $18. I was looking for a pullback before recommending, but we just didn't get one.

The company has signed huge deals with several foreign companies. It has the contracts in place. That's important… But you need to realize the company is not expected to make money for years. You're looking at 2016, most likely, before this company's going to make any money.

When you're looking at the small-cap space, you need to remember the group has had a major correction every year for the past four years. We saw the Russell 2000 fall 30% last year from peak to trough. The year before it corrected about 18%, and I probably don't need to remind you what happened in 2008 and early 2009.

Whenever we see those major corrections, the companies that don't have earnings support and strong balance sheets get hit especially hard. They go down 30%, 40%, 50%. I've been in this industry for 15 years, and you see that all the time. It doesn't matter how great of an analyst you are, it doesn't matter what stocks you pick… All these stocks get hit.

So if you're looking to get into natural gas transportation fuel stocks, there are two ways you could do it. One is obviously to be patient and wait for one of these major corrections to buy. But if you can't be patient or you're willing to bet these stocks are going a lot higher before they correct, I suggest scaling into them.  

For example, if you're looking to buy a 1,000-share position in a particular stock, buy just 200 shares now. After the company reports earnings, buy another 200 shares. If it pulls back, maybe buy another block. Establish the position slowly, even if it takes you a year to do it. It's a much safer way to play these companies.

For Cheniere in particular, I'd be looking for a pullback below $15 or so before buying. Clean Energy Fuels is going to earn money a little bit sooner, but I'd still like to see a little bit of a pullback before buying. Chart Industries is another one to put on your radar. It's also run up a lot – Small Stock Specialist subscribers are up 30% in a few months – but it's one of the few that would be at the top of my list to buy in a pullback.

If I had to buy one today it would probably be Teekay LNG Partners (NYSE: TGP). We also own this one in Small Stock Specialist. It's a little above our buy-up-to price, but it's one of the best names in the space.

LNG shipping rates are through the roof right now. That's because demand is soaring. The Japan nuclear crisis has led to more and more European and Asian countries switching from nuclear to natural gas for electricity usage.  

Teekay is one of the largest shippers of LNG, and it's looking to build even more LNG ships. So this company's in a sweet spot to take advantage of this situation, which I think will be stable for a long time. It pays a 6%-plus dividend, as well. So I like Teekay LNG right here… though ideally, you'd also wait for a pullback.

Crux: We'll be sure to keep those on our radar… Any final thoughts on natural gas? 
 
Curzio: I think it's important to realize that as tough as things look today, it will get better… It will just take some time. As the saying goes, "The cure for low prices is low prices." Natural gas is so cheap compared to oil and other energy sources, we're going to see more and more uses for it develop.

We're already seeing natural gas make its way into heavy-duty trucks. Companies like Pepsi, Coca-Cola, AT&T, Waste Management, and Wal-Mart are switching their fleets from diesel to natural gas and realizing huge savings. It's just a matter of time before it will be powering our cars, too. We'll start exporting it. Demand will eventually soar.

Again, this is not a cyclical change… This is a structural change. We have massive supplies of this clean fuel. It's going to drive an incredible long-term trend… and investors in these stocks could make huge amounts of money.

But you've got to be willing to be patient and be prepared to ride the ups and downs, because we're likely to see a lot of volatility over the next several years.

Crux: Thanks for talking with us, Frank.

Curzio: You're welcome.
 
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Posted by Britannia Radio at 20:53