When to Invest in Companies Hurt by Low Natural Gas Prices: Chesapeake Energy Corporation (CHK) and More

Sir Issac Newton’s gravitational theory is summed up in one sentence: What goes up, must come down. When it comes to economic theory, though, we also assume that if the price on a limited commodity goes down, then it must go up at some point. In the case of natural gas prices, companies on both the winning and losing sides of the shale gas boom are anxious to know when the party (or plight) will change. Lets take a quick look at where natural gas prices are, where they are going, and how it should affect your portfolio decision making.

Chesapeake Energy Corporation (NYSE:CHK)

Companies from both sides of the aisle
The shale gas boom of the past 18 months or so has sent reverberations throughout the U.S. energy markets. Without sufficient demand for this product, spot prices went on a steady decline all the way down to 12-year lows back in April of last year. This has has a profound effect on several companies, and not always in a good way. There are three major industries that have been hit the hardest by low natural gas prices: natural gas producers (think Chesapeake Energy Corporation (NYSE:CHK), coal producers (Peabody Energy Corporation (NYSE:BTU)), and utility companies that don’t have many natural gas operations (Exelon Corporation (NYSE:EXC)).

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts.

On the other hand, both chemical companies and manufacturers have had a pretty impressive run thanks to cheap feedstocks. Companies like LyondellBasell Industries NV (NYSE:LYB) and Terra Nitrogen Company, L.P. (NYSE:TNH), which both use natural gas as a feedstock for plastics and nitrogen fertilizers, respectively, have seen impressive margins in these past couple of quarters thanks in large part to these low gas prices.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts.

Which firms’ activities could lead to price increases?
So how long can we expect natural gas prices to stay down? Surely the prices for a limited resource cannot stay low for long. For this to happen, we will need to see a major uptick in domestic consumption, export volumes, or a combination of both. There is some momentum for both of these directions. Cheniere Energy, Inc. (NYSEMKT:LNG) has locked in long-term contracts to export 2 billion cubic feet per day of natural gas to foreign markets, and both Clean Energy Fuels Corp. (NASDAQ:CLNE) and Westport Innovations Inc. (NASDAQ:WPRT) are spearheading the movement to make natural gas a viable transportation fuel in the U.S. If and when these ideas start to take hold, expect natural gas prices to grow right along with these companies.