Tuesday , 25 June 2024

Invest in Natural Gas – Here's How

[Although] investing in natural gas is an incredibly popular and active sector of the commodity world given its robust growth predictions,…it tends to exhibit violent daily swings with high and liquid volumes. While this can lead to significant losses, for those who play their cards right, trading natural gas can make for a nice short term reward. [That being said,] for the more traditional “buy and hold” investor there are still a number of options that, [while they] may not directly invest in the commodity, offer significant exposure under a safer structure. [In this article I have identified 25 ways to invest in natural gas to help investors pick the correct security for their portfolio]. Words: 1800

So says Jared Cummans (www.commodityhq.com) in edited excerpts from his original article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Cummans goes on to say, in part:

No matter what kind of investor you are, there is certainly a natural gas option that fits your investment style…[Read U.S. Has 3rd Largest Natural Gas Field in the World – Which Other Countries are Included in the Top 10? and review the list below to see what investment approach and specific security is right for you.] 


Futures…are not meant for the average investor [but] for those who fully understand the nuances of these contracts they can be one of the most powerful trading tools for an investor, as they offer exposure that, in some cases, can be found nowhere else in the market. The following futures contracts are offered on the NYMEX at the CME Group:

1. Natural Gas (NG): These Henry Hub futures contracts, which are also optionable, are the most popular for establishing a futures position in this commodity. One contract represents 10,000 million British thermal units (mmBtu).

2. Henry Hub Natural Gas Last Day (HH): Also known as the look-alike last day financial futures, these contracts represent 10,000 mmBtu and the futures settle on the last trading day for each contract month.

3. E-mini Natural Gas (QG): These contracts are not optionable, but represent just 2,500 mmBtu, allowing for smaller investors to still make a strong play on their favorite fossil fuel.

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Investing the equity side of the equation isn’t a pure play on natural gas, but it can make for a number of interesting opportunities that other investment vehicles simply don’t offer. Equities that focus on this commodity will most often consist of exploration, pipeline, or refining companies which can offer a number of advantages over other options. A fair amount of these companies offer strong dividend options and high liquidity for traders of all kinds…

4. Exxon Mobil (XOM): [Al]though [this] firm is…[best] known for its crude oil production, natural gas production and pipelines consist of a substantial amount of their business and it is hard to argue with the liquidity and 2.4% yield [approx.] that this stock offers.

5. Devon Energy Corporation (DVN): Devon has its hands in just about every corner of the natural gas market and there is a lot of speculation that it will move further into [liquid natural gas] LNG in the coming years. DVN pays out a dividend yield of [about] 1%.

6. Chesapeake Energy (CHK): Natural gas production accounts for more than 75% of Chesapeake’s business model while the rest comes from crude oil. With natural gas production dominating crude oil, CHK allows investors to make a stronger play on the commodity while hedging the risks with some crude oil exposure.

7. Cimarex Energy (XEC): This oil and gas exploration/production company is in the business of finding new resources for extraction. Given that there is still a fair amount of natural gas waiting to be tapped into, XEC has a good upside potential.

8. Cabot Oil & Gas Corporation (COG): Stationed in Houston, this company is an independent oil and gas firm [that] holds current proven reserves of about 2,761 billion cubic feet of natural gas equivalents.

9. Range Resources Corporation (RRC): Another Texas-based company, Range Resources engages in exploration and production of the commodity in the Appalachian and Southwestern regions of the US. The stock has a market cap of over $11.3 billion and an ADV topping 3.4 million.

10. EOG Resources (EOG): One of the larger companies on the list with a market cap of $27 billion, EOG spans its operations from nations like the U.S. and Canada, to the Republic of Trinidad and Tobago and China making for a more global play than the previously mentioned securities.

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Exchange Traded Products (ETFs and ETNs)

ETPs have been extremely effective helping to spread commodities to a number of different investors. While it used to be that only futures traders were able to access asset class, ETFs and ETNs have helped the average Joe gain exposure to something like natural gas producers with just one simple fund. When it comes to natural gas, there are ETPs with various investment objectives to give investors exposure to more than just plain-vanilla futures contracts [such as the following, for example]:

11. United States Natural Gas Fund LP (UNG): This ETF invests in front month futures contracts for natural gas and is by far the most popular fund for this commodity. UNG trades more than 8.5 million shares daily [and has] over $1.3 billion in assets.

12. DJ-UBS Natural Gas Subindex Total Return ETN (GAZ): This fund is nearly identical to UNG except that it utilizes the ETN structure, meaning it won’t incur tracking error but it will be at the credit risk of its issuer.

13. United States 12 Month Natural Gas Fund (UNL): UNL is an ETF that holds natural gas contracts for several months out, spreading exposure from the usual front-month strategy, which has led to a lot of criticism for products like UNG.

14. E-TRACS Natural Gas Futures Contango ETN (GASZ): GASZ shorts the front month natural gas contract while establishing a long position in longer-term months. This strategy is aimed at nixing contango, a nasty habit by which an ETP’s automated roll process sells low and buys high automatically, erasing some value from your portfolio.

15. Seasonal Natural Gas ETN (DCNG): This ETN maintains an unleveraged investment in a rolling position in Henry Hub Natural Gas futures contracts plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.

16. Natural Gas Fund (NAGS): This ETF will consist of the following contracts: the nearest to spot month March, April, October, and November Henry Hub Natural Gas Futures Contracts traded on the NYMEX, weighted 25% equally in each contract month. This fund also aims to eliminate contango but charges 150 basis points to do so.

17. UltraShort DJ-UBS Natural Gas (KOLD): This product will seeks to return -200% of its underlying natural gas contracts. While it is a dangerous investment, for traders who have done their homework, this can be a very powerful tool.

18. Ultra DJ-UBS Natural Gas (BOIL): This fund is simply the 2X version of KOLD, and will return 200% of its underlying natural gas contracts. [As with the above] fund, do your homework before investing.

Master Limited Partnerships (MLPs)

While MLPs technically belong under the stocks section, their unique makeup and juicy yields warranted them their own segment on this list. Over the last decade, the Alerian MLP Index of 50 prominent MLPs has outperformed REITs, the Dow Jones Industrial Average, utilities and the S&P 500…

MLPs focus on oil and natural gas pipelines…[which] often come with extremely enticing dividend yields that make them ideal for value investors. Note that owning individual MLPs can have adverse effects come tax season so investors should be cautious when buying one of these high-yielders…

19. Kinder Morgan Energy Partners LP (KMP): An investor favorite, Kinder Morgan operates more than 15,000 miles of natural gas pipelines. The stock trades nearly one million shares each day and has a current dividend payout of about 6%.

20. Inergy, L.P. (NRGY): Though this stock is not as popular as some of the other pipeline firms on the list, its current dividend payout falls just short of 10%, making it a hard option to pass up.

21. Boardwalk Pipeline Partners, LP (BWP): Operating over 14,000 miles of pipeline, BWP has an aggregate gas capacity of around 167 billion cubic feet. The stock pays out a dividend of [approx.] 7%.

22. Enbridge Energy Partners LP (EEP): Based in Houston, Enbridge is home to a natural gas treatment plant, 10 processing plants, and around 4,600 miles of gas pipelines. The stock shows off a market cap of $7.6 billion and a yield of [approx.] 7%.

23. Energy Transfer Partners LP (ETP): Founded in 2002, this firm has a number of processing, treatment, and conditioning facilities dedicated towards this commodity…[and] pays out a competitive yield of [approx. 8%].

24. Natural Resource Partners LP (NRP): Natural Resource isn’t as popular as the other options on this list, with an average trading volume around 225,000, but its yield of [approx.] 7.5% puts it right in line with the others.

25. Buckeye Partners LP (BPL): Though BPL is one of the smaller companies on this list they span their operations out over 15 statesgiving them a wider reach than the majority of the aforementioned firms. BPL’s current yield is sitting at [around] 6%.


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