Drillers have been so successful at developing natural gas resources over the past few years that a huge build up of inventories plunged futures prices 31% in 2011. The remarkable domestic supply of oil that these drillers have been able to produce simply hasn't been met with enough demand. How much longer will investors have to wait for the explosive growth potential of natural gas to be unleashed? (For related reading, see Natural Gas Industry: An Investment Guide.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Energy Independence
It may not be a long wait if dirt cheap natural gas prices remain so, compared with more expensive energy sources around the world. West Texas Intermediate (WTI) crude oil gained 8% during the year, and relief doesn't seem to be on the horizon. Oil is currently hovering near $100 per barrel on geopolitical unrest and Iran's latest round of saber rattling. The natural gas market is waiting for the reality of wealth transference to unfriendly regimes, and the enormous economic benefits that would derive from tapping the abundance of natural gas reserves in North America to make its way down the mainstream pipeline.

If a secular trend is playing out, where dirty, expensive energy sources like oil and coal gradually lose favor, cost effective cleaner burning natural gas stands to benefit. There's a growing consensus, albeit amid stiff resistance, that a practical push toward energy independence in the United States begins with natural gas. Proponents like hedge fund billionaire T. Boone Pickens are leading the charge for a transition away from foreign oil. (To learn more about investing in natural gas, read Oil And Gas Industry Primer.)

Natural Gas Powers Up and Down
The New Year couldn't come soon enough for many natural gas investors. The United States Natural Gas Fund (ARCA:UNG) plummeted along with natural gas prices, down around 48% for the past year. Houston-based Southwestern Energy Company (NYSE:SWN) explores and drills for natural gas and crude oil. Down about 16% for the past year, Southwestern's significant exposure to natural gas prices and geographical asset concentration has pushed the stock to around its 52-week low. Chesapeake Energy (NYSE:CHK) is down a similar amount, about 15% this past year.

Within the natural gas patch, Williams Companies (NYSE:WMB) managed to separate from the pack, rising about 34% in 2011. Williams, an integrated natural gas company, moves forward a lot thinner after the spinoff of its oil exploration and production unit, WPX Energy. There won't be an initial public offering (IPO), as was previously expected, for the holding company. That's unfortunate because the IPO would have generated cash inflow which could have been used to buy assets. Amid the upheaval, management was still able to grow total revenues from $2.6 billion last quarter to $2.7 billion for the quarter ending September 2011. (For more information, read Strategies For Quarterly Earnings Season.)

The Bottom Line
Williams wasn't the only natural gas company that excelled in 2011. Liquefied natural gas company Cheniere Energy (AMEX:LNG) gained around 35% over the past year and El Paso Corporation (NYSE:EP) nearly doubled over the same time frame. Will these companies that did well, despite dirt cheap natural gas prices, continue to do so? Or would investors find more value with companies that corrected along with natural gas prices?

This may not be the question that investors interested in natural gas exposure should be considering. Instead of picking winners and losers, investors would be best served by letting the macro environment dictate the approach. The existing glut of supply has hammered prices, and domestic demand isn't where it should because Washington, D.C. simply hasn't made natural gas a priority. This will constrain natural gas stocks across the board.

Powerful utility and chemical company lobbyists are persuading Washington, D.C. to stall on natural gas, for obvious competitive reasons. Additionally, many environmentalists actively oppose natural gas. They believe the process of fracking compared to drilling for natural gas will contaminate the ground water. There is no consensus yet as to whether fracking poses undue environmental hazards. What is not disputed is the fact that natural gas burns about 50% cleaner than coal and 30% cleaner than oil. Natural gas is clearly a better option in these regards. Moreover, the Environmental Protection Agency recently set new emissions standards for pollutants like mercury. A viable solution for companies that could be negatively impacted by a regulatory penalty is to transition to cleaner burning natural gas.

The political reality is that there probably won't be much legislative action to address the domestic demand side for natural gas until after the 2012 U.S. Presidential Election. There is reason to believe that movement on price is possible in the short-term. The need abroad for cheap alternatives to high-priced crude oil is already showing signs of perking up the natural gas demand side. Also, now that winter weather is finally starting to take hold, following an unseasonably warm autumn, total energy demand will pick up. Higher oil prices would bode very well for natural gas stocks because it would help renew the populist push for alternatives to costly foreign oil. If natural gas prices do show some buoyancy, the momentum is with a trim company like Williams that has a strong 3% yield and targeted dividend growth rate of 10 to 15% over the next few years could deliver steady returns to investors. For growth, Cheniere is worth considering. (For related reading, see Uncovering Oil And Gas Futures.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!