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Time to Switch to Natural Gas?

A couple of articles, both at Seeking Alpha, got me to thinking about whether it might be time to trade in my Petrobras (PBR) stock for something in the natural gas sector. From the first of the two articles:

Natural Gas Should Get a Boost from China’s New Demand

China has been developing natural gas vehicles for many years, recently the number of vehicles running on nat gas has risen dramatically. For example, the government of Xi’an in western China, a medium size with 8M population, has decided to mandate all city buses and taxis using natural gas. The government website reported 5000 buses and 20000 taxis was using nat gas in 2008, and is expected to grow in coming years.

That wasn’t the most interesting bit for me. This was:

With natural gas price at historic low $3.74, investors should take advantage and invest in ETF such as (UNG), or producers such as Chesapeake Energy Group (CHK), Devon Energy Corp (DVN) and XTO Energy (XTO).

I haven’t been following natural gas prices closely, and would have expected them to be on the rise like oil prices. Speaking of which, the other article was about Petrobras, and it argued that the price is poised to rise further if oil prices continue to climb:

Petrobras Ready to Benefit from Next Oil Price Spike

During the credit crunch, there were concerns Petrobras would have trouble obtaining financing to exploit Tupi. The stock dropped from over $70 to a low of under $15 in November of 2008. However, the stock has recovered nicely as credit crunch worries have subsided and financing deals have been reached with China and others. Recently PBR traded above $43/share. The PE=11.7 and the dividend yield is a scant 0.70%. But this isn’t a dividend story. Unlike US majors XOM, CVX, and COP, Petrobras is a story about strongly increasing production in an age of peak oil. That will certainly lead to increasing profits and a stock that will outperform its peers.

To me, this explains why PBR is trading at $43 a share. But I bought PBR at $17.50 in November – having just barely missed the bottom – and it has risen sharply with oil prices. But I think the upside at this point is limited unless oil prices continue to climb. In fact, I would have sold it already if I wasn’t trying to wait long enough to benefit from the long term capital gains tax rate.

And while I think there is some upside left to PBR, natural gas stocks should go sharply higher if natural gas prices start to respond to higher oil prices. (Historically, this correlation has not been very good, but the two have correlated well in the past few years). We are also entering the low demand time of year for natural gas, and prices also reflect that. But if your outlook is a bit longer than past this summer, natural gas is looking like a real bargain to me. In fact, natural gas stocks remind me of PBR back in November…

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June 10, 2009 - Posted by | CNG, investing, natural gas, PBR, Petrobras

22 Comments

  1. "Xi'an in western China, a medium size with 8M population, has decided to mandate all city buses and taxis using natural gas."There was a wonderful photo, 15 years ago, back in my NGV days of a bus in China that had been converted to natural gas — looked like a partly-inflated hot air balloon was sitting on top of the bus. Can't imagine that the bus was able to do much better than walking speed. China's use of natural gas vehicles is not a new development.By the way — a medium-sized (!)city of 8 Million. And the alarmists still think that the West cutting back will have any impact on global anthropogenic CO2 production?

    Comment by Kinuachdrach | June 11, 2009

  2. I used to take natural gas powered bus to work in Santa Barbara every day. It wouldn't climb hills worth a damn but I suspect that's just engine horsepower.

    Comment by robert | June 11, 2009

  3. “We are also entering the low demand time of year for natural gas, and prices also reflect that.”Spring and fall are low demand for NG with NG being put in storage. Summer and winter are high demand. Entering last winter and again entering this summer, storage levels are above a 5 year average. Droughts are a big factor too. Two out of 5 years is drought year in the west averaged over 50 years. Anytime a large coal or nuke plant goes off line, an inefficient NG plant starts up since the efficient ones are already running. If a NG pipeline blows up or a coal rail line is damaged, the NG futures market gets nervous. Then there is the economy. Ouch! That may be a game changer. The US has also lost a lot of industry that used NG. “With natural gas price at historic low $3.74,” These are not historic lows, just not OMG highs. Until the economy heats up, I expect NG to be in the $4-6 range.

    Comment by Kit P | June 11, 2009

  4. one could also look at the consumer support infrastucture for NG beyond the commodity and its E & P. PIPELINES, ENGINES, LOCAL DISTRIBUTORS come to mind. if the new vast supplies now found in shale are to grow, justifying price increase in USA, the associated support structure ought to grow also. in Asia, reduction of air pollution should be catalyst for NG.kinder/morgan, willims,etc[pipelines], westport-cummins truck/transport, clean energy fuels[vehicle fuel support]. in china — CHNG, SNEN [both NASDAQ LISTED].LOTSA LEGISLATION NOW IN CONGRESS TO DRIVE THIS. fran

    Comment by Anonymous | June 11, 2009

  5. Robert,I think perhaps some people were confused that you were seeking stock market advice,CNG is a good topic.John

    Comment by Anonymous | June 11, 2009

  6. "Spring and fall are low demand for NG with NG being put in storage. Summer and winter are high demand."That data don't agree. If you go to the EIA database for natural gas consumption, you will see that summer is in fact when demand tends to be lowest:Natural Gas DemandSeven out of the past eight years saw the low demand month as either June or September. RR

    Comment by Robert Rapier | June 11, 2009

  7. But June is mostly spring and autumn starts in September. ;)But I agree, all the July and August months are below average (mean) monthly natural gas consumption.

    Comment by Clee | June 11, 2009

  8. Fran said……..in Asia, reduction of air pollution should be catalyst for NG.Here is an old (like 5 years old) article from The Ministry of Environment in Korea……..______________Quote""In the 1990s, the use of natural gas was actively promoted to reduce emission gases from large-scale diesel vehicles and thereby solve vehicle-generated pollution problems. As opposed to diesel buses, natural gas buses do not produce any smoke, and result in 70% reduction in O3 and NOx. In the unlikely event of an accidental release, Natural gas is non-toxic – unlike diesel fuel. And since it’s “lighter than the air”, Natural gas dispenses quickly. It has a higher ignition temperature than either gasoline or diesel, making accidental ignition less likely that with either traditional fuels." It is an interesting article because it also mentions Japanese goals and European targets up to 2010. It is quite dated, however.http://eng.me.go.kr/docs/news/hotissue/hotissue_view.html?topmenu=E&cat=520&seq=22&page=4John

    Comment by Anonymous | June 11, 2009

  9. Sure the data agrees, RR and Clee need to look closer and then read what I wrote for understand.July and August are the peak for NG consumption for electricity generation. Gas is coming out of storage, not going in.Given how often the market experts are wrong I would presume to give RR information. When RR is wrong, other readers may want to heat a different point of view.

    Comment by Kit P | June 11, 2009

  10. Ben Cole,Where are you ? Well,,, I don't blame you….This is not a discussion about CNG but about stock plays,John

    Comment by Anonymous | June 11, 2009

  11. Okay, since I was asked…I have been pondering NG plays too. But really, due to family reasons, I am putting all my marbles into farmland in Thailand. I did short oil when it hit $100. I was one of those guys who found out (again) that the markets can stay irrational longer than you can stay solvent. Or maybe the market was manipulated. My investment advice might be a contrary indicator.It could be NG goes up. However, there seems to be tons of supply. It could be oil has to come down, eventually, as NG will stay cheap. We may discover even cheaper ways of getting shale gas. The huge volumes may create economies of scale. NG is used in Thailand, for fleet taxis and trucks. I would say one out of ten trucks on the main highway in Thailand were CNG. They carry white torpedoes behind the cab. Eight of them, often. To repeat myself, the wonderful thing about the huge and growing NG supplies is that hey completely destroy any doom scenarios. One has to imagine that we run out of oil, and do not convert our fleets to NG. It may be neither happens, as we have gobs of oil left too. On investing, remember that oil plays looked ironclad in 1979. Oil back then hit $45, we were told $100 was coming and doom-talk was a constant.Nothing happened, and oil became cheaper for decades in a row. The regular stock market boomed, 1980-2000. I never would have believed that two such great decades were in store for, back in 1979. Right now, it is tough to be optimistic. I agree with Kinu's sentiments, our political parties and government seem incapable of leadership, and barring that, then getting out of the way of free enterprise. I sense Europe is passing us by, and the Far East. Thank G-d for Latin America, we can always look down our noses at them. Africa too. I think Obama, like Bush, is blowing opportunities for leadership. After 9/11, Bush could have proposed nearly anything and gotten cooperation. Instead we got Iraq.Obama might have been able to craft a tax-gas with income tax cut proposal. Instead we get blabber about green jobs. NG? Time will tell, But remember, you are looking at a commodity that will be flush for years with supply.

    Comment by Anonymous | June 11, 2009

  12. Of course, take care of your family.Thailand is beautiful, I have been there.In your case there is certainly no "doom" scenario. You can just live off bananas and coco-nuts in the tropics forever (just kidding)There are lots of ways to make money in the market. Growth Sector investments such as natural gas are just one.I expect CNG skate-boards to come out any day.I almost bought Valence (VLNC) at 98 cents a share. It doubled in a very short time. Just a penny stock…………I didn't. Oh well, "No guts – No glory", I guess.

    Comment by Anonymous | June 11, 2009

  13. It will be interesting to see what pricing for non-gasoline fuels will go. When Oil was at it's high,Wood Pellets for my stove went up and still are much higher than 2 years ago. Increased demand for "waste" products,less business supplying wood waste + increased transportation cost lead to higher pricing. I think that we will see some heavy foresting here in New England. I see increased Garbage Dump mining and more tapping into sewerage for resources as well. (http://www.greentechmedia.com/articles/read/fertilizer-feed-and-other-valuables-in-wastewater/ ) Altough outside the boundries of this discussion, I thought some might find this artice on dry rock drilling interesting. http://newenergyandfuel.com/http:/newenergyandfuel/com/2009/06/11/a-new-way-to-drill-for-geothermal-energy/

    Comment by takchess | June 11, 2009

  14. "Sure the data agrees, RR and Clee need to look closer and then read what I wrote for understand."First off, I know what you wrote: "Spring and fall are low demand for NG with NG being put in storage. Summer and winter are high demand."That is simply untrue. You can go to the EIA site – which I linked to – to show actual consumption numbers. What you did was shoot from the hip – without providing any source – and you were wrong. Now, still without providing any data – you want to continue to insist you are correct. That's not how it works. You want to argue your point, post the data. "I am right, you are wrong" doesn't work, especially given your history here. "July and August are the peak for NG consumption for electricity generation."Again, that's not what you wrote originally. You didn't write "high demand for electricity generation", you wrote "high demand." No doubt natural gas demand for electricity consumption is higher in the summer; it's just not what you wrote and you are now trying to back pedal. I wrote "We are also entering the low demand time of year for natural gas", and that is in fact true. In the next post, if you want to continue to argue the point, show data. How about this? Take a rolling 3 month average and tell me when demand is high during the year. (Hint: It isn't summer as you claimed, because I already looked).Of course you could simply admit you were wrong, and we could move on.RR

    Comment by Robert Rapier | June 11, 2009

  15. S&P cuts rating on Brazilian oil firm Petrobras

    Comment by The Dude | June 11, 2009

  16. RR,Any takes on this: http://v2.ftalphaville.ft.com/blog/2009/06/11/56933/the-problem-with-commodity-etfs/

    Comment by Peter | June 11, 2009

  17. "S&P cuts rating on Brazilian oil firm Petrobras"The stock itself has been downgraded by a couple of brokerages as the price has risen. As I said, I would sell right now, but I am gambling that oil prices won't collapse again before I can sell in December and get the tax rate I want."Any takes on this: http://v2.ftalphaville.ft.com/blog/2009/06/11/56933/the-problem-with-commodity-etfs/"That was interesting. That's also a reason many investors get burned. There is often a lot more to the story than meets the eye. By the way, at the bottom of that story was a link to another that had this bit:If prices were based on thermal content alone, the usual ratio of crude oil price per barrel to natural gas in dollars per MMBtu should be ≈6:1 according to the EIA. But as Schork points out (our emphasis):As of last Friday the ratio between spot NYMEX WTI ($/bbl) to the corresponding Henry Hub contract ($/MMBtu) was 17.3:1. In today’s Chart of the Day we posted the NYMEX ratio (adjusted per contract points). Either way, upon first glance it would appear that natural gas is a buy relative to crude oil.But while first appearances may suggest natural gas is ‘a buy’, Schork cautions that first looks can be deceiving. For one, the relationship between crude and natural gas has certainly been acting very strangely in the last few months.

    Comment by Robert Rapier | June 11, 2009

  18. I wonder how many industrial & transportation applications allow a *rapid* switch between oil and nat gas in response to relative prices.

    Comment by David | June 11, 2009

  19. DAVID–do a search on bifuel auto + CNG and other combinations. the world outside N. America is full of options.fran

    Comment by Anonymous | June 12, 2009

  20. anon..I'm aware of dual-fuel vehicles. Few passenger cars are likely to convert to this mode due to range and trunk space issues, although there's a lot of potential for local delivery vehicles. My question is more about how many large industrial users already have an installed dual-fuel capability (viz, for a process heat boiler) and how big a deal it is to add this capability if you don't already have it.

    Comment by David | June 12, 2009

  21. DAVID–NG shaving plants are used frequently in electric industry for peak loads. the NG add on is found on many applications–even your house can be fitted with auxillary thru wall gas to existing oil burning water/steam systems.by the by, dual fuel is used all over the world, except USA–for some esoteric reason i've yet to understand.fran

    Comment by Anonymous | June 12, 2009

  22. Eh? Dual fuel plants not used in the US? This article implies they were popular in the 1980s. http://pepei.pennnet.com/display_article/210626/6/ARTCL/none/none/1/Economic-Impact-of-Dual-Fuel-for-Gas-Turbines-Studied/I've also heard of people getting dual fuel furnaces to heat their homes in the Northeast back when it changed from winter to winter which would be cheaper, oil heat or gas heat.

    Comment by Clee | June 13, 2009


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