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Recent Trends in Natural Gas Market: Opportunity for Value Investors


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Last month we mentioned how steel saw a negative trend and its price have dropped almost 71% over the past 12months.  And as such identifies an industry worth more research to see if any individual companies are undervalued.  This month we have identified natural gas.

Looking at the above chart for the past 10 years, we see a downward trend.  In fact over the past 52Weeks, the High was $3.02 and the Low was $1.64. That is about a 33.19% drop over that timeframe.  Natural gas makes up about 25% of the energy consumption within the United States.  All in all, from 1990 to 2016, natural gas obtained its highest price back in December 2005 of $15.39 and conversely reached its record low in January 1992 at $1.02. 

The economics models expect natural gas to trade at $2.08 by the end of the 1Q2016.  For 2Q2016 estimates are $1.97.  The 3Q2016 forecast are about $1.86.  For the $Q2016 figures are projected at $1.75.  However, the estimates for 2020 are higher at $2.63.  Looking at the 1992 to 2016 chart below the top trend line indicates an upward trend to about above $5.00 into the future.  Of course, this is only a projection and we are talking a time period beyond 4 years from now.  With many variables that can occur between now and then.

As you have most likely already concluded, there is no obvious conclusion.  This situation is a mixed bag with no definitive direction given based on this data alone.  Letís pull back a few more curtains shall we?  Recently a US bankruptcy judge ruled the oil & gas companies can reject contracts made with midstream firms prior to the oil and gas drop.  Does this mean that others will follow suit?  No pun intended.  Some fear this would set off a negative trend that would have others seek bankruptcy protection and deepen the distressed industry.

This is a case in point where you want to look at a negative trend, thanks to Mr. Market.  However, that alone is not enough.  Some individual companies within this distressed industry are not going to be able to weather the long-term storm, while some will.  Some companies created their contracts with a 20 year term in mind and have established relationships via contracts for exports outside the US where market demands are higher.  Thus the key is deep research towards finding a company with strong fundamentals with a Margin of Safety (MOS) with a long-term investment horizon. 

Our subscribers to our PWC STOCK REPORTSSM subscription service had access to our security analysis pointing to a specific undervalued company that will most likely benefit over the long-term.  

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 5/1/16

 

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