For months, we’ve been advocating natural gas as a contrarian profit play – and now you’re starting to see why.
Natural gas companies are producing less fuel. Energy producers have switched to natural gas from coal. Summer temperatures have been higher than anticipated. And severe weather disruptions in the Gulf of Mexico have hurt supply.
The end result: Natural gas prices have jumped 42% since hitting a 10-year intraday low of $1.902 per million British thermal units (Btu) on April 19.
The weather has been a huge factor. Triple-digit temperatures first blasted the east coast and then moved onto the Midwest. The number of so-called “cooling degree days,” which measure natural gas use, was about 33% higher than normal this week. And temperatures will soar even higher in July.
Additionally, Tropical Storm Debby, while mild, still forced gas producers to curtail about one billion cubic feet of daily production, whittling supplies.
However, the real story involves a drop-off in natural gas production and a massive shift among power producers away from coal.
Drilling Dries Up
Dry gas drilling has declined by 42% over the past eight months. And the gas-directed rig count last week fell by 21 to 541 – the lowest level since 1999.
The decline was telegraphed in major energy producers’ first-quarter earnings statements, which showed a 3.8% decline in ConocoPhillips’ (NYSE: COP) oil and gas production and a 5% decline for Exxon Mobil (NYSE: XOM).
In fact, Exxon CEO, Rex Tillerson, said his company was making “no money” whatsoever on natural gas.
“We are losing our shirts,” Tillerson said at a breakfast event in New York.
Exxon’s not the only one cutting bait on natural gas, either. Chesapeake Energy (NYSE: CHK), the country’s second-largest natural gas producer behind Exxon, says that more than half of its 2012 revenue will come from the production of oil and liquids.
All in all, U.S. gas production in 2012 will slide 2.6% from 2011 levels, with the possibility of a further 0.5% to 1% decline over the next couple of years, according to an analysis by GlobalData.
And that’s not all.
A New Opportunity for Natural Gas
Further downstream, companies that produce electricity are shifting from coal to natural gas, thereby increasing gas consumption.
Gas costs for power plants fell to the equivalent of $1.3783 per million Btu less than coal in April – the biggest discount since coal futures began trading in 2001.
So power companies have increased natural gas use by about one-third to take advantage of cheaper prices.
Take Southern Co. (NYSE: SO), for example.
In 2008, coal made up 70% of Southern’s electricity generation. Now it’s 32%. And the company’s chairman and CEO, Thomas Fanning, recently told Bloomberg that Southern expects to generate 57% of its power from natural gas by 2020.
Then there’s American Electric Power Co., the biggest producer of coal-fueled electricity in the country. American said on April 20 that it used 62% more gas in the first three months of the year.
This shift is occurring nationwide – and it’s permanent.
Consider that in 1985, coal fueled 57% of all the power generated in the United States. That figure fell to 42% last year, and the Energy Information Administration (EIA) estimates it will be 40% by the end of 2012.
In fact, the EIA expects U.S. coal consumption this year to be at its lowest level in a quarter-century.
So while Exxon, Chesapeake and others may be hurting now, they can take solace in the fact that natural gas inventory growth will wear down in the months ahead, as demand rises and supplies drop.
And that’s not all. Investors can benefit, too.
In fact, we’ve found a company that just this week shot up nearly 2% on the natural gas price rebound. The great thing about it, though, is that it’s still incredibly cheap because mainstream investors haven’t caught on to the latest developments.
And as natural gas prices build momentum over the summer and into the winter, this stock will shoot drastically higher. Better still, it pays a juicy 5.7%, so you can earn a big-time payout just for taking the ride.
The problem is, we’ve already recommended the stock to paid subscribers, so we can’t give it away for free.
But all you have to do to get it is sign up for a risk-free trial for WSD Insider.
If you have reservations, remember: The trial is free, you’ll get immediate access to the stock report, and you’re under no obligation to stay subscribed.
So you really have everything to gain and nothing to lose.
But you have to do this now. If you wait until the rebound hits full swing, it will be too late.