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.
One value-oriented gas investment
Apache Corporation (NYSE:APA) is a value-oriented bet on U.S. gas. It’s a less-leveraged play than Chesapeake Energy Corporation (NYSE:CHK), since Apache is much more diversified in its asset base, both within the U.S. and internationally. That said, if gas prices soar, Apache Corporation (NYSE:APA)’s top quality on-shore assets should make the company’s value soar as well. The company’s shares have slumped to multi-year lows on a litany of operating hiccups.
Even if the aforementioned operational problems prevented Apache Corporation (NYSE:APA) from reaching its production targets, and produced weaker-than-expected capital efficiency, there are some bright spots that should not be overlooked. The Permian and Central Region assets (on-shore U.S. assets related to shale) sharply exceeded expectations, and there might be a lot more to come from this side.
Having under-performed its large cap peer group by 32% over the past 12 months, Apache Corporation (NYSE:APA)‘s shares trade at a 44% discount to peers on 2014 cash flow multiples. While Apache should trade at a discounted valuation, given its above average offshore leverage and higher reserve replacement costs, I think the current discounted valuation is too wide and should narrow going forward.
Bottom line
The three options mentioned above are valid plays that should benefit hugely if the U.S. starts exporting LNG. While the ETF is a pure play on price, Chesapeake Energy Corporation (NYSE:CHK) and Apache Corporation (NYSE:APA) are leveraged bets. They should benefit from a cash flow perspective, and from a higher valuation of their asset base (above all in Chesapeake’s case). The U.S. energy revolution just started, so let’s get ready to benefit from it.
The article Gas Exports: Top Implications originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
