Commodity Q&A: Winners and Losers in the Natty Bear Market

The Commodity Investor Q&A
With Matt Badiali
September 09, 2009

Q: Who wins and who loses with natural gas so low? Is there any play right now on it? – A.H.

A: In short, natural gas producers lose and natural gas consumers win.

Back in June, I warned you natural gas prices were in trouble and unlikely to recover. Now, we're at the point where producers become really marginal businesses. The better-managed ones are in for a rough time. The ones with lots of debt are probably headed under soon.

BreitBurn Energy Partners, for example, saw its line of credit slashed from $900 million to $776 million. It had to cut its dividend to stay afloat... and faces bankruptcy if natural gas prices stay low. Constellation Energy Partners and Quest Energy Partners are in a similar situation.

So I'd rather look at natural gas consumers for opportunities...

Industry consumes about 46% of all the natural gas produced. It's a fuel for electrical generation, incineration, and metal smelting. It's also a feedstock for chemical applications like methanol, plastics, and fertilizers.

Residential consumption ranks second to industry at 35%. Commercial demand ranks third at 19%. Commercial and residential consumers use natural gas mainly in heating, cooling, and cooking.

According to the Natural Gas Supply Association, there is a lag built into the prices paid by natural gas consumers, thanks to hedge contracts. A "hedge" is nothing more than a long-term contract at a set price (or range of prices). Most consumers don't want exposure to the daily changes of the spot market, so they'll lock in prices for months at a time.

That means many consumers haven't yet fully benefited from the declines seen in the spot price of natural gas, which is down 85% from its 2008 high.

As you can see in the chart, consumer prices were still fairly high in June (the latest data).

Natural Gas Is Down 85% But Most Consumers
Haven't Seen Prices Drop That Far

Industrial users saw the largest recent decline in prices, about 65%. Commercial and residential prices haven't fallen nearly as much, at 40% and 32%, respectively. That means the big winners in the natty bear market are industrial consumers like electric utilities and big agricultural chemical companies.

I like big chemical companies that use natural gas as a feedstock, like Dow Chemical (DOW) and Methanex Corporation (MEOH). I also like big energy companies that use natural gas to make electricity like Calpine (CPN). And fertilizer producers, like Agrium (AGU), consume a ton of natural gas.

Agrium swung from a $60 million loss in the first quarter to a $370 million profit in the second quarter. While all that can't be attributed to low natural gas prices, they surely helped.

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You can take advantage of low natural gas prices with shares in power companies and fertilizer companies. But keep in mind, many other factors will determine the outcome of your investment.

I'm not convinced low gas prices can overcome a general economic slump in the long term... and most of these stocks are up big since March.

So the best way to play natural gas might be to run a gas pipe to your house and switch your utilities over, since residential prices are still falling.

Good investing,

Matt Badiali

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•	Dollar weakness continues... greenback falls to 2009 low against euro.
•	Royal Bank of Canada and National Bank of Canada hit new highs.
•	Apple makes a 52-week high... up over 100% off its March low.
•	Indian car company Tata Motors jumps 7% yesterday on talks of increased exports.

	Last	Change	52-Wk
S&P 500	1030.66	+0.25%	-19.58%
Oil (USO)	37.54	+1.58%	-60.76%
Gold (GLD)	93.21	+0.45%	+14.57%
Silver (SLV)	14.07	-0.15%	+5.39%
U.S. Dollar	77.97	+0.49%	+4.96%
Euro	1.44	+0.90%	-2.30%
VIX	24.62	-1.32%	+24.60%
HUI	359.64	+1.91%	+3.79%
10-Year Yield	3.46%	0.02	-0.28

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Company	Sym	Industry
Eldorado Gold	EGO	gold mining
Tata Motors	TTM	Indian autos
United Micro	UMC	semiconductors
Agnico-Eagle	AEM	gold mining
Kinross Gold	KGC	gold mining
Barrick Gold	ABX	gold mining
Franco Nevada	FNNVF	gold royalty
Ivanhoe Mines	IVN	metals mining
Comp Brasileira	CBD	groceries
ConAgra Foods	CAG	packaged foods
ASML	ASML	semiconductors
AngloGold Ashanti	AU	gold mining
Novo-Nordisk	NVO	pharma
ON Semiconductor	ONNN	semiconductors
Red Hat	RHT	software
Dr Pepper Snapple	DPS	soft drinks
Marvell	MRVL	semiconductors
Newcrest Mining	NCMGF	gold mining
Swisscom	SCMWY	telecom
Westpac Banking	WBK	bank
CGI Group	GIB	software
Advanced Semi	ASX	semiconductors
Micron Tech	MU	semiconductors
Gold Fields	GFI	gold mining
Cadbury	CBY	chocolate
Kyocera	KYO	electronics
Natl Australia Bank	NABZY	bank
Silver Wheaton	SLW	silver mining
Lubrizol	LZ	chemicals
Addax Petroleum	ADXTF	refining
Sterlite	SLT	copper mining
Broadcom	BRCM	semiconductors
Infosys	INFY	business software
Roy Bank of Canada	RY	bank
Virgin Media	VMED	TV programming
Ultrapar Holdings	UGP	gas distribution
NVIDIA	NVDA	semiconductors
Pearson	PSO	book publishing
Vmware	VMW	systems software
Goldcorp	GG	gold mining
Apple	AAPL	computers
Makita	MKTAY	power tools
IAMGOLD	IAG	gold mining
N Bank of Canada	NTIOF	bank
Cognizant	CTSH	outsourcing
Gap	GPS	clothing stores
Telecom Italia	TI	telecom

Company	Sym	Industry
Osiris	OSIR	biotech

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