Monday, June 7, 2010
Last week – as the stock market dropped (just as Jeff Clark predicted) and the vital base-metal sector got hammered (just as Matt Badiali predicted) – one niche commodity sector showed incredible strength...
That sector is U.S. natural gas royalty trusts.
In late March, we began highlighting natural gas as the "contrarian's commodity." Huge new domestic supplies of the clean-burning fuel have come online in the past five years... which has destroyed the natural gas price. Just two years ago, natural gas traded for around $12 per million British thermal units. It has traded as much as 75% lower than that in the past 12 months.
As Matt detailed, this price destruction sent natural gas to incredibly cheap levels relative to its energy cousins crude oil and coal. It also presented a buying opportunity in companies that produce natural gas. You see, the way to make really big money in a commodity is to buy when prices are blown out... and when nobody wants the stuff.
To play gas, we recommended buying shares of companies that own the production rights to vast swaths of natural gas fields: natural gas royalty trusts. These companies have tax structures that allow most of their production to go toward large distribution payments to shareholders.
We didn't say natural gas was going to scream higher anytime soon, simply that natural gas was done falling... and royalty companies would pay us big dividends while we waited for the trend to turn up.
One of the largest natural gas royalty trusts is San Juan Basin (SJT). The company collects royalties on wells operating in the San Juan Basin of northwestern New Mexico. San Juan doesn't do the dirty work of exploring. It just collects checks... and gives shareholders the cash it earns from selling a beaten-down asset. Distributions are running in the 8%-10% area here.
San Juan Basin and its sector are exhibiting extraordinary price strength right now. Last week, stocks reached their lowest close since February. And many commodity-related stocks have been hammered as folks worry about global economic growth.
As these hurricane force winds blew, what did San Juan do? It hit a new 52-week high!
Although I'm impressed with the short-term strength in San Juan Basin, I'd hold off on taking a new position right now. Natural gas is one of the most volatile commodities on the market... and San Juan has enjoyed a huge run. It's due for a pullback.
But for the long term, buying natural gas positions – and royalty trusts in particular – is the "hurricane-tested," contrarian way to profit in the commodity market.
Euro breaks key level... drops below $1.20 on Friday to a four-year low.
Debt worries send foreign banks lower... Credit Suisse, Banco Santander, and Mitsubishi Financial hit 52-week lows.
Natural gas continues surge... up 14% since Tuesday. Crude oil trades flat.