Value Investing Forum

My opinion of natural gas is  really dependent upon the energy plan before Congress which I believe intends to use it in our transportation sector however its increase in use will be at the expense of potential groundwater contamination and its implementation likely will be slow. Since our economy is so desperate to create higher paying new jobs and it is a great way to lower trade deficits.  I expect it to eventually pass and thus will change my longer term view on the commodity. At an energy equivalent gas is trading if oil were at $25/bbl so there is an arbitrage opportunity in gas.

Regarding  the pending peak oil argument the exact timing has so many factors it is difficult to estimate. It is hard enough to look out a few years let alone a decade or more. I know the very long term pictures of many commodities but as an investor I am really more concerned what will happen to it over the next few years since this sector is very cyclic and to spot trends before other people. IMO commodities main driver has been driven  by fed policy and for the most part  ignored supply/demand metrics since the credit crisis.

 If you were to look to the long term prognosis for oil supply  the main production key factors are dependent upon how smoothly new supplies from the Santos Basin and Iraq reserves comes onstream and how long they can prevent depletion especially at Ghawar. Worldwide supplies are not in shortage and dometically Cushing is at storage limits because of the success of fracturing the Bakken shale. China and India is expected to raise consumption by 9 million bbls /day in 5-10 years however,  I believe that amount of growth is unattainable.

Post edited 8:55 pm – April 29, 2011 by FIFOkid

I think the cheapest natural gas stock is HOIL.L  as the market is valuing its reserves at almost nothing on an EV basis. The company is trading at 15% of its potential NAV and around 5% if you subtract its cash. However, the big problem is the company does not generate much cash flow from production and the company has been reliant upon finding the mega discoveries and selling them for their cash flow generation. The company also has had a string of plaguing negative new flow events since their original discovery of the field  over 2 years ago which originally to be thought as an 4-8 billion bbl oil field but recently revised to mainly a 6-12 TCf gas field about 2 months ago.

Natural gas prices certainly is a laggard but it is a hostage of massive oversupply in North America and the industry is limited for potential export so the price hasn't risen with the other commodities thus not currency sensitive. I am not a buyer of the sector or HOIL yet because I still see the macro environment still negative for natural gas. They need to really incorporate natural gas into the transportation sector for me to gain interest in the sector. What is saving the pure play producers in North America now is forward selling but the contango has been shrinking by around 1.50 per mcf over a course of a year.

I  disagree that the near term problem is undersupply with excpetion to the ag and precious metals sector. If you look at long term inventories of many industrial metals, natural gas and crude they have been rising year over year. The commodity condition has been caused from an oversupply of currency specifically USDs. However, I have noted that a major shift in monetary conditions in other posts that are starting to line up to potentially undermine commodity prices.

BTW if you want to consider a mega cap energy company Anadarko has a better portfolio of reserve/production growth than CHK and its portfolio of producing assets has a better mix of production however, the price has risen remarkably since the Macondo incident.

If concentrating on the precious metal side there are now quite a few small/micro cap companies trading at 2-3 times expected cash flow for the year like Orvana, Orosur and Atna. Endeavor Mining is now slightly over 1 time CF if you consider EV assuming current metals pricing but then again finding cheap companies are starting to become a dime a dozen so the market is ignoring them.

I recommend taking a look at Grantham's recent quarterly letter:

GMO Quarterly April 2011 (you may need to sign up for an account at GMO but that's free)

I have long thought that the limited resources on our planet would start to run out and the folks at GMO are starting to put together some data that shows we may start seeing the effects of that.

So the interesting question is, can we find some stocks that have ownership of some valuable commodities?

One commodity that really jumps out at me is natural gas. (I noticed it's been lagging but now GMO has some hard evidence that it actually is and not just some uneducated guess on my part.) So my first thought would be something like CHK.

Any other commodities are specific stocks that may be worth a look?