Small Cap Profit Opportunity in Natural Gas
One of the big trades for 2010 is going to be natural gas. It bottomed last year and is still trading at a discount compared to oil. The oil-to-natural gas ratio is currently around 14, a huge drop from a high around 24 in 2009. Just take a look at the 6% rise in natural gas today, and it appears as though many investors, and companies, are thinking good times are ahead for clean burning natural gas.
French oil company Total SA (NYSE: TOT) recently announced a $2.25 billion deal with Chesapeake Energy (NYSE: CHK) to purchase 25% of Chesapeake's Barnett Shale assets and to help fund 60% of the company's drilling and completion expenses in that region. I must admit, the news of this deal was great for subscribers to my Top Stock Insights and Recovery Portfolio services, since I hold the stock in both those portfolios. Chesapeake's shares have risen 28% since December 9, and 10.7% since the deal was announced on January 4.
The investment is a big bet by Total that prices for natural gas will go higher from here as the deal will provide the company with around 175 million cubic feet of natural gas production per day. That's the equivalent of 30,000 barrels of oil, an energy source that is only getting more expensive to locate.
It's certainly true that new reserves like the Barnett Shale region mean there is a lot of new gas coming on line, but power companies are increasingly making the move away from coal and toward natural gas as electricity demand increases. Natural gas is cleaner burning than coal and I expect demand for natural gas will push prices back above $10 per thousand cubic feet (mcf) in 2010. Natural gas has fallen nearly 70% from its high in 2008 and now trades for less than $6 per mcf.
I saw this rebound in natural gas coming back in May of 2009 when I added China Natural Gas (Nasdaq: CHNG) to the SmallCapInvestor PRO portfolio. And that stock has done quite well for subscribers since, rising 80% by the end of 2009. But this company's stock still has more upside to come.
China Natural Gas is currently trading at only 10.9 times trailing earnings, yet the company grew net income in 2008 by 66%. I expect growth in 2009 will be only marginally higher than in 2008 due to the severe drop in gas prices. But the fact that the company could grow at all after a 70% decline in natural gas prices is a testament to its growth prospects. And if natural gas prices rise in 2010 as I expect, than look for China Natural Gas to reap big profits.
***It looks as though China's economy will grow by 8.5% in 2009, which is simply phenomenal. What's more, economists are expecting growth to rise to 9% in 2010. Don't make the mistake of thinking growth in China is unsustainable. The government has a mandate to grow GDP at 8% annually, and consumer demand is improving. For example, Toyota (NYSE: TM) saw Chinese auto sales rise an impressive 21% in 2009.
As you know, I was bullish on China throughout 2009. And my SmallCapInvestor PRO readers benefited with 81% and 94% gains from two of my top Chinese recommendations.
China operated more like a corporation in 2009 than most investors realize. And that means it will continue to reward its investors. So if you don't have any Chinese stocks in your portfolio yet, I'd like to help you take advantage of this profit opportunity.
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