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Commodities To Hate, But Own Anyway: Exxon Mobil Corporation (XOM), Royal Dutch Shell plc (ADR) (RDS.A)

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Goldman Sachs says buy commodities. Hedge funds are trimming their bets. What’s an investor to do? Try buying stocks with exposure to unloved commodities like natural gas and coal.

Who’s Right?

Bloomberg.com ran an interesting article about the confusion in the commodity market. The article’s first sentence sums it up pretty well: “Hedge funds cut bets on a commodity rally to a four-year low on signs of surplus supply in everything from coffee to zinc before Goldman Sachs Group Inc. said prices had fallen too far and investors should buy.”

Instead of trying to follow this divergent advice, how about a look at commodities that aren’t on most investors’ radar screens.

Natural Gas

Natural gas prices in the United States remain at historically low levels. The reason is that new drilling techniques have unlocked reserves and created a supply glut. Low prices have led to utilities switching to natural gas over coal since low prices have made the fuel competitive for base load use. Meanwhile, with low prices, drillers are focusing their efforts on their more profitable oil activities, which will eventually limit supply.

So, supply and demand will line up at some point and natural gas prices, over the long term, are likely to rise. Investors interested in the space might want to consider two oil majors that have been increasing their exposure to natural gas in recent years: Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A).

These two companies are international energy giants with widely diversified businesses. This provides a shield of sorts from commodity fluctuations, though it doesn’t remove the impact that such price changes can have. The push this pair has made into natural gas in recent years includes Exxon Mobil Corporation (NYSE:XOM)’s purchase of XTO and Shell’s acquisition of East Resources. When natural gas prices move higher, the negative of owning such gas assets will turn into a positive.

Exxon Mobil Corporation (NYSE:XOM) is rightly considered a core energy holding. It is appropriate for conservative investors. Royal Dutch Shell plc (ADR) (NYSE:RDS.A), meanwhile, is located in a financially weak region and doesn’t enjoy the same market opinion of its shares. Indeed, Exxon Mobil Corporation (NYSE:XOM)’s dividend yield is around 2.5% and Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s is over 5%. Shell’s risk profile probably isn’t as high as the dividend discrepancy suggests, however, making the stock appropriate for even moderately conservative investors.

Coal

The future of coal and natural gas are currently entwined in an unusual way. With electric utilities increasingly using cheap natural gas, coal companies have seen demand and prices fall. Add the negative public view of coal, and there’s a good reason to hate the energy source as an investment. However, as natural gas prices rise, coal demand will likely increase as utilities switch back to using this reliable and low cost base load energy source.

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