Why I Think You Got to Look at Natural Gas (Again)

Don Coxe on Natural Gas in his February 21, 2008 Conference Call

Another commodity that we have not had good things to say about for a long, long time - natural gas - is one I want you to start looking at. And I want you to pull up a long term chart on natgas and what you'll see is this is a long term base pattern after the panic associated with Katrina when we told you to get out of the natural gas stocks and switch to metals.

It's a long sideways move. But the reason why I think you got to look at natural gas, again, is that it looks like it's about to break out of its base on the upside. And if it does, the natural gas, which is a short reserve life index fuel in the US, is now a situation where massive amounts of capital are being committed by the big oil companies led by ExxonMobil on pulling out tight gas from formations where in the past they couldn't possibly extract the gas. They're using new technology. This is expensive gas.

We're going to get a new floor price for gas set by this. In the case of ExxonMobil they're reason for doing it is primarily to protect their reserve life index. They've had to cut it by three full years, this year, because of what's been happening to them on oil from political risk. And, because of this magic that you can use six units of natural gas to equal a barrel of oil then ExxonMobil by developing reserves of natural gas, high-priced gas, can protect its reserve life index on this barrel of energy equivalent.

ExxonMobil is a brilliantly run company. They're going to do what they can to preserve their reserve life index. But another big company is involved in this because you've got General Electric promoting, once again, the sale of gas turbines for electricity. And with oil prices staying high and if you look…if you take the price of oil as far ahead as 2010 - December oil is now at 92.34, which means that for users of residual, what they can't see is any relief in the future. And natural gas, of course, also wins on the basis of environmentally-sound fuel because of small amounts of air pollution.

So I think you're going to have major companies out there with big followings. They're going to be promoting this. And what they can't do is rely on LNG for the reasons we've discussed on so many calls, particularly terror risk, but in addition the fact that the LNG suppliers out there, so much of it is from places in the world that have definite levels of political risk in them. That was going to be the saviour.

And as I told you before, six years ago I attended a meeting of the partners in the natural gas industry in the Chicago Land, which was both the users of natural gas and the major pipelines that delivered gas. And at that time I watched as the head of Marathon Oil's operations for natural gas in North America covered a wall with a chart of all the natural gas fields with their reserve life indices. And he pointed out that by the end of this decade, we were going to be facing a full-blown crisis in this country for natgas, but it was going to be solved by a pipeline that was going to bring it in from Canada.

And I got up at the meeting, spoke after him and said first of all he also said that LNG was going to come in big and I said I don't believe all those LNG projects are going to go forward because of 9/11. And the guy from Marathon jumped up and said “Who invited him to the meeting? We checked out our approvals for these projects with the FBI and they've all been approved as being safe. and I said, "Have you talked to them since 9/11?" and he said "No, we didn't have to. We've got approvals." And then I said, "As for the pipeline in Canada, that's not going to go forward in this decade. Not a chance." Once again he jumped up and said, "We have all the arrangements in place. We've got an agreement from the federal government in Ottawa that it's going forward," and I said, "You haven't got an agreement from the native peoples." Well the meeting became very difficult at that stage because once again he said I didn't know what I was talking about and there weren't going to be a few native tribes holding back a project like this. I tell you that only because it illustrates that the industry collectively had a comfort level on gas, which wasn't vindicated.

So we could get yet another energy surprise coming. And that's not just because we've
had such a cold winter because, of course, nobody out there who could be intellectually respected thought we could have cold winters. But, because it illustrates that the supply side response that you would have ordinarily expected, has been constrained by conditions they can't control.

So I think you have got to start looking at natgas as being maybe the next commodity that's going to join the bull market, having been in not a real bear market but a nothing market, for so long.
--------------------------------------------

This is the time to start buying oil and gas income trusts. I have been buying Paramount (PMT.UN), NAL Oil & Gas (NAE.UN), PennWest (PWT.UN) and Daylight Energy Trust (DAY.UN).

When The Sun Doesn’t Shine and the Wind Doesn’t Blow We Need Natural Gas

When the sun doesn’t shine and the wind doesn’t blow, we need natural gas. Until new plants are approved and built for clean coal and nuclear, we need natural gas. If we want to subsidize agriculture, we need natural gas to convert food crops to energy. To supplement oil that faces increasingly short supply, we need natural gas. Finally, if hydrogen is going to be the last clean fuel, it will likely be created from natural gas.

Natural gas weighted Canroy's have natural gas selling at half price, judging by the incremental price of liquefied natural gas in Asia. Last week, according to trade reports, Japan paid $18 a million btu for the liquid form of the same commodity that is priced in the futures market at $8 for the next six years.

Since $18 LNG is roughly equivalent to $100 oil burned in the same Japanese power plants, the stark difference points to an upward price trend for the clean fuel.

Meanwhile, monthly distributions are likely to be higher in 2008 judging from the trend in the price for natural gas prices.

I have been buying NAE.UN, PMT.UN and PWT.UN.

Bought 2,000 Units of NAL Oil & Gas Trust Today

This year has been terrible for stock market and I have been staying on the sidelines (like everyone else) and waiting for the market to bottom.

However, I could not resist and I bought 2,000 units of NAE.UN at $11.84 each.

The results of three high impact wells from the Seneca acquisition are nearing release. Depending on the outcome of the three Seneca wells, NAL could have further development potential opportunities with its partners.

Presently, NAE has has a $0.16 per month ($1.92 per year) distribution resulting in a yield of 16.2%. The payout ratio 69% and the payout ratio including capital expenditures is 114%. This Trust has some exploration upside potential. With a +15% yield you get paid to wait. Hopefully we not only get our distibutions but some capital gains potential too.

NAL Oil and Gas Trust -NAE.UN-T- Has Interesting Exploration Upside

RBC reports that Q3 Results are good with 45% production from natural gas and 55% from oil.

At the close of the third quarter 2007, NAL had 650 boe/d of production ready to be tied in, which will occur in Q4 2007. Furthermore, NAL is primed to increase its production as a result of a number of development projects now underway.

The next milestone are the three high impact Seneca Wells which are getting closer . The results of three high impact wells from the Seneca acquisition are nearing release. Depending on the outcome of the three Seneca wells, NAL should have further development potential opportunities with its partners.

RBC's target price and Rating Unchanged. RBC are maintaining their 12-month price target of $12.25 /unit, and an Outperform but RBC have not included the possible results of the three new wells.

We believe NAL has an interesting mix of exploration and development prospects converging in 2008, which could prove financially rewarding to patient investors.

I had a large position in NAE in 2006 but I sold it all because of the Halloween 2006 Tax Fairness Plan massacre.

Presently, NAE has has a $0.16 per month ($1.92 per year) distribution resulting in a yield of 15.6%. The payout ratio 69% and the payout ratio including capital expenditures is 114%. This Trust has some exploration upside potential. With a +15% yield you get paid to wait. Hopefully we not only get our distibutions but some capital gains potential too.

Now that is investing for income!