The shale gas revolution in the U.S. has made internal gas prices tumble from more than $10 per million of british thermal unit (mmbtu) to the current $4 per mmbtu, thanks to the supply boom. Low prices are bad news for producers, but great news for industrial companies that use natural gas intensively, such as Alcoa Inc. (NYSE:AA) or The Dow Chemical Company (NYSE:DOW). This cost advantage may remain going forward, but not at the current level. According to the Financial Times, “The Obama administration has signaled support for more plants to export Liquefied Natural Gas (LNG), as the U.S. embraces its surging energy production as a key new element of its national security policy”.
Investments you should consider
If the U.S. starts exporting LNG, local prices are poised to surge to somewhere in between $4 and the $14 price that exists for net importers like Japan (the largest importer of LNG). Here, I propose three ways to bet on surging gas prices.
The simplest bet
The easiest way to play a surge in gas prices is using an ETF. The most commonly used ETF to play U.S. gas prices is United States Natural Gas Fund, LP (NYSEMKT:UNG). The fund is designed to track the movements of the price of natural gas, as delivered at Henry Hub, Louisiana. This is done by tracking the price of futures contracts on natural gas on the NYMEX that is the near month contract to expire. The ETF has a 0.99% total expense ratio and trades at 1 times NAV. It’s a good way to play the gas market if you don’t want to own a company’s specific risk.
Can your portfolio bear some risk?
After many problems related to corporate governance, Chesapeake Energy Corporation (NYSE:CHK) sacked its ex-CEO and founder, Aubrey McClendon, and is re-organizing itself very efficiently. Mighty investors, such as Carl Icahn, have taken a share of the company, and Chesapeake Energy Corporation (NYSE:CHK) is ready to continue its growth path. The company was created to take advantage of the shale oil and gas revolution, and it owns a huge amount of acres in all of the most interesting shale areas within the U.S. Even if it’s probably true that it will take significant progress on asset sales and a further increase in gas prices before the shares start outperforming the market, the company is already focusing on the right matters – corporate governance and operational efficiencies. Chesapeake Energy Corporation (NYSE:CHK) still has a $3.5 billion funding gap in 2013, with more wood to chop to achieve its asset sales target. That said, the price is already reflecting the problems that the company has (but is already addressing). Trading at 85% NAV and 2013 13 times P/E, I think the company is a good leveraged play on the U.S. gas industry. You may want to go long with Chesapeake Energy Corporation (NYSE:CHK) if you can bear risk in your portfolio.