• Natural gas inventory is up.
• Rather mild weather has kept demand low.
• Liquefied Natural Gas (LNG) imports are at record highs.

But that doesn’t mean we won’t see a rise in price. In fact, many of us here at Penny Sleuth expect nothing less than a record year for natural gas.

With oil hitting new all time highs every day — it currently sits at $108 per barrel — natural gas will be called on, more and more. You see, oil and natural gas have a unique connection. Many large-scale customers (industrial consumers, electricity generators, etc.) can switch between oil and natural gas, depending on price and supply. We expect many of these customers to make that switch to gas this year.

A second argument for high natural gas prices is the demand for fuel. Whatever your opinions about ethanol are, there’s no question that it’s going to be a big factor over the next few years. The U.S. Congress dictates it. At the end of 2007, Congress mandated an increase in ethanol production of over 414% (from seven million gallons to 36 million gallons) by 2022. But what was forgot in the process was that it takes a boatload of natural gas to produce ethanol.

Here in the U.S., corn is the largest source of ethanol. To grow corn, it takes a lot of fertilizer. The price of fertilizer is 90% dependent on the price of natural gas. Therefore, it takes a lot of gas to make fertilizer. Don’t laugh… On top of that, what do you think these ethanol plants burn to turn corn into their precious ethanol? More natural gas!

But putting the fuel argument aside, most of us think of natural gas as a way to heat our homes. Well, whether you like it or not, the housing boom put many Americans in larger homes. It takes a lot of natural gas to heat those mansions.

The last point I’ll make about natural gas’ inevitable price climb is its environmental effects. Most people don’t know this, but natural gas is one of the cleanest burning sources of energy we have at our disposal. Take a look at this chart:

Okay so natural gas is going to go up. But, how do you profit? Well, in a previous article, Nick Jones offers Delta Petroleum Corp (DPTR: NASDAQ) as a solution.

That’s a bit expensive for our tastes, even if it is the solid company Nick suggests it is. It weighs in at a little over $2 billion market cap, selling at about $22 a share. So let’s look at a few that fit our parameters:

• Aurora Oil & Gas Corporation (AOG: AMEX) — This is a very small $60 million company with the majority of its stake in Michigan, Indiana and Kentucky. It’s an early stage production company. While it has been growing at a phenomenal rate, it’s still a risky investment.
  
• Edge Petroleum Corporation (EPEX: NASDAQ) — Edge comes in at $4 and change per share. About three quarters of the company’s production comes from natural gas along the Gulf coast. This is also a high growth opportunity. Year-end earnings come out on Thursday. We’ll be keeping our eye on this one.
  
• Grey Wolf, Inc. (GW: AMEX) — The Wolf is nothing more than a rig owner. The company owns rigs it leases to oil and gas companies. The majority of its customers are major natural gas drillers throughout the U.S. and Mexico. The company sells at slightly higher than $5 per share. We’ll continue to watch this one as its customer base grows.

While we aren’t recommending you buy shares of any of these companies, we do want to give you a clue as to what we look for in natural gas. We either want fast growing producers with large reserves, or specialist companies that can feed off of the rising prices without any of the risks associated with production.

In any case, we will continue to watch this market. I see a lot of good things coming from it down the road.

Sincerely,

Jim Nelson
March 11, 2008

P.S.: Chris Mayer has been following this story for quite a while. He was one of the first of us to come to conclusion that natural gas is going to skyrocket. He recently gave his readers a special opportunity that he calls the “The Biggest Resource Breakthrough Since the ‘Beaumont Miracle’ of 1901.”Editor’s Note: The gas companies listed above were recommendations from our readers. If you have anything to add or any other questions, you can always send them to us at jim@pennysleuth.com.

The Natural Gas Industry is About to Catch Fire was originally featured in the Penny Sleuth.