Natural gas is so laughably cheap right now and yet most investors are completely clueless about it.
How cheap is it?
Well, right now a barrel of oil costs about $95.
For the equivalent amount of energy, you’ll pay just $24 for natural gas.
On an inflation-adjusted basis, oil has NEVER been as cheap as $24 a barrel. Obviously, natural gas is an inferior fuel, but on an energy-to-energy basis, it’s almost impossible to find an instance in modern history when fuel was this cheap.
I don’t know what exactly lies ahead for the natural gas market, but whenever a useful energy resource sells for a discount to other energy resources, you have to be a buyer – and you especially have to be a buyer when everyone seems to be ignoring the asset.
As famed resource investor Rick Rule says, when it comes to commodity investments, "you’re either a contrarian or you’re a victim."
I still think that most investors have yet to "believe" in this commodity bull market, so being in this space automatically gives you some degree of contrarianism in your portfolio.
But of all assets in the resource space, natural gas might be the least understood, and it’s certainly among the cheapest.
While gold, silver, oil, coal, corn, wheat, copper, lead – everything else is at least approaching nominal highs, if not inflation adjusted highs, natural gas is bringing up the rear.
So if you already own oil and gold and the rest, you should probably diversify in the commodity asset class by picking up some natural gas exposure now.
Because it’s not likely that natural gas will remain this cheap very much longer.
How to invest?
Right now, you can own the largest natural gas company in North America for less than 12 times earnings. This company pays a trailing annual dividend yield of 2.2% – a rate that’s competitive with 10 year Treasury yields.
And the comparison to the Federal Government doesn’t end there, because at times during the month of July, this company had MORE cash than the US Treasury.
I’d argue that they’re much more solvent than the US Government, as they have a manageable debt load, lots of income streams from a variety of energy investments – and right now they have lots of upside exposure to a rise in the price of natural gas in the United States.
I say "in the United States" not because they’re lacking exposure to natural gas outside of the US, but because natural gas prices in the US are among the lowest on the planet.
They will rise – whereas I believe natural gas prices in Europe and Asia aren’t as likely to rise. The natural gas boom in the US is now on the cusp of being replicated in a variety of potential fields in Europe and Asia – and with prices upwards of 3-times higher what they are in North America, there’s plenty of incentive for explorers to do what’s necessary to find new gas in Europe.
Okay, enough teasing.
The company I’m talking about is Exxon-Mobil (NYSE: XOM).
In early 2009, Exxon bought out the then-largest natural gas company XTO Energy.
It was a huge deal at the time, worth $41 billion, somewhat overshadowed by what still looked like a deep recession.
Today, Exxon is the biggest natural gas producer in North America.
Buying this company gives you upside exposure to higher natural gas prices – in addition to letting you own a piece of one of the best oil companies in the world.
If you don’t already own Exxon, I’d consider it a must-own stock for the next 10 years and probably forever.
If you do own it, there’s no time like the present to own more of it. Why look elsewhere at this stage of the game for oil and natural gas?
Almost any other company you buy in the market is going to be more risky – especially with all of the uncertainty these days. Sometimes being a good investor is all about not over-thinking the situation. I think we’re in such a situation right now.