If you blinked you will have missed it. A 78% gain in under a month.
From a low of $2.50 on 3 September, the price of natural gas has risen to $4.46 today. But there could be plenty more to come…
Why has gas rallied so fiercely? Well, to start with, because it had fallen so hard. While the price of oil doubled, gas was making new lows right up until September. That was partly due to the supply glut in the US. According to the EIA, gas storage is at all-time highs.
However, a cold winter would prompt the Americans to start eating into this oversupply. The heating season really begins in October. It won’t be long before the global natural gas glut turns into a deficit and prices start to take-off.
We expect to see a sharp pick-up as we head into the end of the year. This is a good time to position yourself for the rebound.
We’ve uncovered three opportunities which can help you play the rally…
Two for a rising market
It is perfectly simple to invest in the actual gas commodity. On the London exchange the ETFS Natural Gas (symbol NGAS.L) trades for around $0.55 per share. It provides like-for-like gains and losses with the movements in the American natural gas price. You can buy it just like a share and, unlike a futures contract, it has no set expiry.
In theory, you could hold this exchange traded note for years as a core portfolio investment. The problem is that it doesn’t pay a dividend. And it is the reinvestment of dividends which is such a core component of a successful long-term investment discipline. But for those with a shorter-term horizon, NGAS.L provides a clean vehicle into a clean commodity.
Another way to play this is an American company with the slightly exotic name of the San Juan Basin Royalty Trust (NYSE symbol: SJT). The company has a 75% net overriding royalty interest carved out of Burlington Resources’ oil and gas leasehold and royalty interests in properties located in the San Juan Basin of north-western New Mexico.
Because of its tax structure, this company has to pay out almost all its income in the form of dividends. That means the higher the natural gas price, the higher the income and the higher the dividend payout. The current price is about $13.50 and the 2008 payout totalled $3.07, for an historic yield of 22.8%. The current payout is much lower, reflecting the lower gas price. However, the vehicle does offer tremendous income leverage if and when the price of gas recovers.
Even better, the distributions are paid monthly, so you receive a very regular income flow. Be aware that the Americans levy with-holding taxes on US-derived dividend distributions; these are not punitive and can usually be offset against UK tax due on the same dividends, but it is something to bear in mind. For potentially very profitable leverage to the gas price to be taken in the form of income, SJT looks like a very compelling story with moderate risk.
One play a bit closer to home
From the pure commodity play and then the geared income play, we return to the world of “ordinary” shares. Priced in Sterling, quoted in London, with a vast geographical exposure and much respected management is one you probably know well, BG Group (symbol BG.L).
One of the most impressive statistics for BG Group is its after-tax return on capital employed, and this has remained steady in the high 20% bracket (28.7% for 2008) for several years. Operating profit was down 9% year on year for the first quarter of 2009 and this will not likely be a banner year throughout which will be of scant surprise.
BG Group is a growth story, not an opportunistic story. It does provide excellent exposure to natural gas but in a long-term context. The dividend is low (currently just over 1%) but can be expected to grow routinely over time.
Exploration and production companies, especially when on the growth track like BG, internally consume most of their cash flow in the development of assets. Over time, such reinvestment is the key to growth and a 1% yield today with regular increases and share price growth may have turned into a 10% yield on today’s cost price in ten or so year’s time.
A direct play, a geared income play and a long-term growth play. Whichever of those concepts most appeals, they should all capture the resurgence in gas that is already underway.
Best wishes,
Joss Smith
For The Right Side
Editor’s Note: Joss Smith is a fund manager for Richmond Advisers and a regular contributor to The Fleet Street Letter. Joss has uncovered another gas play. This one is a high-risk/high reward foreign value stock that has just been formally recommended in The Fleet Street Letter. To receive this alongside the rest of the team’s tips, click here.
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