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

Based on current prices for natural gas futures contracts, this may take longer than some expect.

Source: Barchart.com, authors calculations (futures prices as of Feb 11, 2013 @ 13:00).

The problem with relying on exports and new demand as a catalyst for higher gas prices is the time associated with these ideas. Cheniere does not expect to make its first delivery of exported natural gas until 2015, and it will surely take even longer for any company to build out an infrastructure to make natural gas a comparable replacement to gasoline as a transportation fuel. So, unless there are any major shifts in domestic production in the next couple of months, don’t expect prices for natural gas to change too dramatically.

What a Fool believes
The natural gas party will not last forever. As long as there is a disparity in energy prices, either between domestic and foreign markets or between comparable energy sources, there are companies out there that will look to take advantage of the situation, which will ultimately bring prices to an equilibrium. This means investors could potentially jump into companies that are down on their luck because of low natural gas prices and then ride them for the long term.

While the theory behind investing in the natural gas losers makes sense, keep this in mind: The timeline for these improvements could be longer than many expect. For many of these companies, it makes more sense to try to shift their business strategies for the time being rather than hold out for higher gas prices. Chesapeake Energy Corporation has done so by shifting its production more toward liquids and oil rather than gas only, and Peabody Energy has gone to great lengths to secure long-term export contracts so it can send its coal overseas.  Moves like these, ones that show a company’s ability to shift its strategy when new market conditions present themselves, will lead to much better outcomes than waiting for natural gas prices to rise.

The article When to Invest in Companies Hurt by Low Natural Gas Prices originally appeared on Fool.com and is written by Tyler Crowe.

Fool contributor Tyler Crowe owns shares of Westport Innovations. You can follow him on Fool.com under TMFDirtyBird, Google +, or Twitter @TylerCroweFool.The Motley Fool recommends Clean Energy Fuels, Exelon, and Westport Innovations. The Motley Fool owns shares of Westport Innovations and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.

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