The Only Answer for U.S. Natural Gas Investing
By Matt Badiali
January 20, 2010

Apache must be reading Growth Stock Wire.

Over the past couple months, we've been discussing the natural gas situation abroad and here in the U.S. For those of you who are just tuning in, here's the deal:

Right now, the U.S. is in the middle of a massive natural gas supply glut. And prices here have barely budged off eight-year lows. Demand abroad is huge and growing. But U.S. natural gas producers can't ship gas out to take advantage. There just aren't enough liquefied natural gas (LNG) export terminals. That's going to keep a lid on U.S. gas prices... and a lid on profits for U.S. gas producers.

Well, Apache Corp, a U.S. independent oil and gas company, just bought 51% of the Kitimat LNG port in British Columbia. Kitimat will begin exporting about 700 million cubic feet per day in 2014. Apache's share of that equals about a third of its current North American production (nearly 20% of its total natural gas production).

This gives Apache the ultimate security: the ability to ship it to other markets. For just one example, Japan paid over $9 per million British thermal units (BTU) for natural gas in November 2009. At the time, U.S. prices dropped as low as $2.52 per million BTUs.

But so far, only Apache is doing something. Nearly every other natural gas company in the U.S. and Canada is waiting for the U.S. market to come back...

I hate to be the bearer of bad news, but the supply glut is here for the duration. We're just coming off a record cold snap, the longest, and coldest in 50 years in Florida. Natural gas demand was so high, pipelines into Florida couldn't send enough gas in. During the week of January 8, 2010, gas in storage fell an estimated 266 billion cubic feet... the second largest withdrawal in history.

After all that, natural gas prices only rose to $7.52 per million BTUs. That's a significant jump from the bottom, but still barely clears most natural gas producers' costs. As soon as the cold weather passed, prices fell back to $5.60.

The natural gas industry in the U.S. and Canada is a victim of its own success. Advances in horizontal drilling and other techniques led to an explosion of natural gas reserves.

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There's a huge glut of U.S. natural gas and no place for it go. Without new sources of demand or export opportunities, the U.S. natural gas industry will decline. That's why Apache's plan is so important.

It's the first company to take any kind of action to get its natural gas to an outside market. That bodes well for the future of the company... and potentially for the U.S. natural gas industry in the long term.

Good investing,

Matt

P.S. Of course, Apache's export plan won't kick in for at least four years. That's why – for now – I still prefer buying international gas producers, which have direct access to the Asian market. I just visited one halfway around the world... and I think it could be the biggest energy find of the decade. To read more about my trip, click here.