As of August 27, 2007, oil has been trading at a relatively high price of about $72/barrel for reasons explained in my last energy article, but natural gas was only trading for $5.59/mmbtu. To read about how the natural gas industry works here in the US along with charts/graphs about the supply and demand of natural gas over the years, click here for an article entitled “Understanding Natural Gas Markets”. As you can see from this graph from Charles Augustine’s Understanding Gas Market’s article, natural gas spot prices have declined from high of $12/mmbtu at the end of 2005 to their current level in the mid $5 range. Seems like quite a reversal is such a short amount of time, and probably a good time to look for stocks oversold in the natural gas industry.
If you want to play the natural gas ticket while prices are relatively low, pay attention to Nabors Industries (NBR), the largest land based natural gas driller. Nabors was highlighted in an August 20 Barron’s article saying that there are many opportunities that exist from this highly profitable company with a forward PE of 7. Robert Marcin, the head of Defiance Asset Management in Conshohocken, Pa. states that “Nabors doesn’t need to hit the current 2008 consensus estimate of $4 a share for investors to do well. If Nabors makes $4, it’s a home-run stock. It could trade in the 50s. Even with $3 a share in earnings, Nabors could be a $40-to-$45 stock.” Nabors has over 600 land drilling rigs and has operations in the US, South America, Africa, the Middle East, Central America, and Canada. The natural gas industry will seek some short-term catalysts to help natural gas related companies and an improvement in the currently weak North American market, especially in Canada when in July it was reported that Canadian operations had its first major quarterly loss since the early ’90s.
If you’re looking for a producer of natural gas, Nabors would be the stock to look at, but if you believe in the pipeline business of petroleum and natural gas, then BJ Services Company (BJS) would be the stock to check out. BJ Services is near their two-year low and provide pressure pumping services for oil and natural gas companies. They help enhance the production of natural gas on land and offshore as well as maintain services to existing natural gas wells. BJS has a stimulation service that accounts for 69% of their 2006 pressure pumping revenue which uses different methods to deter any pipeline hindrances of the pathway of oil and natural gas.
Also if you look at the ratio of oil to natural gas over the last decade, it seems that oil trades at around a six times premium where the current commodity prices ($72 oil to $5.50 natural gas) stand at a 13:1 ratio. For the sake of Nabors and its competitors, hopefully natural gas prices should rebound to get closer to the six to seven times premium.