Is now the time to wade into the natural gas sector?
Over the past twelve months, stocks in the natural gas sector have fallen by an average of 22 percent compared to the S&P 500 which increased by approximately 2 percent during that same time period. With the relatively large price declines, some natural gas stocks have become cheap on multiple valuation standards. Is now the right time to wade into this sector?
- With the introduction of a process called fracking, the natural gas supply has increased substantially over the past 4 years. Each day, the U.S. natural gas market produces an average of 3 billion cubic feet more than the nation consumes. This excess supply has caused a large price disparity between crude oil and natural gas. Historically, the price of crude oil has been about 10 times more expensive than natural gas. Today, crude oil trades at approximately 50 times higher than natural gas.
- Some natural gas companies are trading cheaply. However, this could remain the case for some time as it could take years for electric utility, trucking companies, and consumers to make the switch to natural gas. Furthermore, the US was a net importer of natural gas for years. As a result, there is little infrastructure currently to export natural gas to Asia and Europe where natural gas trades at 4 or 5 times the price in the U.S. At the moment there is infrastructure being created in Louisiana to export natural gas by 2015-16
- With the cheaper valuations these stocks look attractive at these levels. However, these companies are far from debt-free and have cash flows at lower volumes per share than compared to their pre-financial crisis levels. With their potential growth these stocks should be used in the portion of an investor’s portfolio that is focused on long term growth
*The opinions and forecasts expressed are for informational purposes only and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. The representative does not guarantee the accuracy and completeness, nor assume liability for loss that may result from the reliance by any person upon such information or opinions.
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