Two Pipeline Plays to Heat Up Your Portfolio This Winter!

The U.S. remains dependent on foreign oil supplies from the Middle East. And that relationship has put our economy over an economic and strategic barrel, so to speak.

In order for the U.S. to gain energy independence we need to explore and develop our own energy resources here at home, including coal, wind, nuclear, and above all, natural gas and shale.

The benefits are as clear as they are long-reaching. In addition to truly start the weaning process from foreign oil, a move to such fuels would add jobs, cut costs and provide forward-thinking investors with the opportunity to produce some great year-round returns.

Vast Resources Right
under Your Feet!

Unlike many other power sources, in addition to the ability to heat or generate electricity, natural gas also provides practical and compelling alternatives to run our vehicles. In fact, some transit authorities already run fleets of natural gas powered buses and other municipal vehicles. The U.S. Department of Energy estimates that natural gas buses now account for at least 20 percent of all new bus orders in the U.S.

And the best part … the United States produced 600 billion cubic meters of natural gas in 2009, likely surpassing Russia as the world’s largest producer!

So natural gas exploration combined with green energy-saving initiatives, and technologies, could provide the key to energy independence in the U.S.

In order to profit rather than implode, you must understand the factors that can affect natural gas. However, even if you know the pitfalls, the natural gas market can be challenging, volatile, and risky. It’s also important to understand the seasonal differences that can impact natural gas.

Natural gas can be a volatile but profitable market.

Weather factors are the biggest driver, especially any type of disruption to the Gulf Coast. A hurricane headed toward the Gulf Coast is one of the worst scenarios for natural gas. When storage facilities, pipelines, workers, and transport are interrupted, gas production grinds to a halt.

Now even though natural gas is active in the summer to produce electricity for cooling, winter is when natural gas is used the most. Heating homes with clean burning, easy to use natural gas was touted for years.

As new homes were built and pipelines improved, builders opted for natural gas over heating oil. Demand for natural gas is likely to continue to increase, especially as crude oil prices ratchet up and drive heating oil prices up too. So how can you jump on board to make some profits from the shift to natural gas?

Your Best Way to Play
the Natural Gas Boom

While the futures market for natural gas is very good it’s also quite expensive. Volatility comes with a price, and margins for natural gas are pricey. But if you’d rather get involved without laying out that kind of margin, there is also a very active options contract. Calendar spread options contracts provide additional risk management and speculative opportunities for the right investor.

The futures contract trades in units of 10,000 million British thermal units (BTU) and is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s huge gas deposits. Pipelines cover markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border.

However if you want to trade resources but shy away from futures and options, I think the best way to play it is to choose solid, well-financed companies.

When Sean Brodrick and I go on the hunt for natural gas companies for our Global Resource Hunter subscribers, we go for low-cost producers with good reserves in the ground.

Using that criteria, here are two companies worth taking a look at: Southwestern Energy (SWN), and Williams Companies (WMB), which has vast amounts of gas in the ground and a major pipeline network to transport it.

Remember, natural gas trading can be extremely profitable but also comes with risk, so be sure to understand all the nuances of this market. And always use good risk management techniques when trading in markets like natural gas.

Regards,

Kevin Kerr