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The Flip Side of the Natural Gas Bear Market

By Matt Badiali, editor, S&A Resource Report
Wednesday, April 11, 2012

These days, producing natural gas is an ugly business...
 
Natural gas prices are down 45% in the last 12 months. Even shares of well-known "low-cost producer" Ultra Petroleum are down 60% in the same time. Its peers are down big as well... and scraping new 52-week lows.
 
But there's a profitable side to this bloodbath... one that could lead to big investment gains.
 
Companies that use gas to generate electricity are seeing lower costs... and higher demand.
 
Take Calpine, for example. Calpine is an $8.2 billion power company. It operates a fleet of 91 power plants. It's one of the largest natural gas utilities in the country.  
 
As recently as 2009, natural gas power sold for around $42 per megawatt hour. Coal-produced power sold for $20-$35 per megawatt hour.  
 
Natural gas couldn't compete... It was only used at peak times, when the market needed as much energy as possible and would pay the higher price.  
 
But that's changed... Coal-produced power is now going for $18-$35 per megawatt hour. And natural gas power is going for about $17.  
 
As prices have fallen, the demand for Calpine's power production has grown. Its power plants went from peak generation to full-time power production.
 
Calpine's Texas operations, for example, have increased production 51%. That's the most dramatic increase I found. But it's indicative of a shift happening all across the U.S.
 
And even as it's seeing higher demand, Calpine is paying less for fuel.  
 
Like most power companies, it has "hedges" in place that mean it isn't 100% exposed to moves in the natural gas market. But it is benefiting a bit. And that benefit will increase as it removes its hedges over the next couple years.
 
Already, its bright future is showing up in the share price. Take a look...
 
 
 
Shares are up 40% in the past two years. And the company produced $108 million in free cash flow in 2011, up from just $59 million in 2010.  
 
Calpine is more of a "pure play" on natural gas power than most utilities, which are still using a lot of coal. But everyone's rushing to switch over and reap the same benefits.
 
Here's a list of other major power producers... and how much of their power comes from natural gas...  
 
Company 
Market Cap 
% Natural Gas
Power 
Nextera Energy 
$26.1 billion 
54% 
Consolidated Edison 
$16.7 billion 
43% 
American Electric 
$18.3 billion 
36% 
Southern Co.
$38.8 billion 
30% 
Dominion Resource 
$29.0 billion 
28% 
 
The companies with the largest natural gas generation capacity, like Calpine, are going to be the clear winners over the next decade.
 
As long as low prices hold for natural gas – and they could hold for a very long time – producing power with natural gas will be a great business.
 
Good investing, 
 
Matt Badiali




Further Reading:

Natural gas storage levels are at record highs for this time of year... and inventories are still increasing. Larsen Kusick is predicting natural gas prices will stay low longer than anyone expects. Read more here.
 
And learn how to profit off these low natural gas prices here...  
 

In The Daily Crux
Market Notes
Five-month uptrend in stocks hits a bump... the S&P 500 touches its lowest level in over a month.  
 
Market "fear gauge" VIX breaks out to a one-month high... soars 33% over the past week.  
 
Global oil giants are going on sale... ExxonMobil, Chevron, Total, BP, and Occidental sit at three-month lows.
 
Ag boom is shifting into a downtrend... Monsanto, Mosaic, Deere, and CNH Global all touch three-month lows.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1358.59 -1.7% +2.3%
Oil (USO) 38.51 -1.2% -14.7%
Gold (GLD) 161.10 +1.1% +12.1%
Silver (SLV) 30.79 +0.7% -22.8%
U.S. Dollar 79.86 +0.1% +5.7%
Euro 1.31 -0.2% -9.6%
Volatility (^VIX) 20.39 +8.4% +14.1%
Gold Stocks (^HUI) 449.25 +1.2% -25.9%
10-Year Yield 1.99 -2.5% -44.3%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 135.90 -1.7% +4.4%
Japan (EWJ) 9.65 -1.2% -1.3%
Singapore (EWS) 12.45 -0.7% -7.4%
S. Korea (EWY) 57.75 -2.5% -10.0%
S. Africa (EZA) 64.73 -1.5% -11.7%
Lat.America (ILF) 45.67 -1.8% -14.0%
Taiwan (EWT) 12.70 -1.3% -14.2%
Israel (ISL) 13.56 -0.8% -16.5%
Canada (EWC) 27.03 -1.6% -19.5%
China (FXI) 35.75 -1.7% -20.8%
India (IFN) 21.61 -1.4% -32.0%
Russia (TRF) 15.73 -2.0% -35.0%

Sector ETFs
Symbol Price
Change
52-Wk
Retail (PMR) 24.92 -2.3% +18.5%
Big Tech (QQQQ) 66.13 -1.6% +17.2%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Consumer Svcs (IYC) 78.37 -2.1% +11.7%
Health Care (IYH) 75.98 -1.4% +10.9%
Utilities (XLU) 34.26 -1.3% +10.6%
Real Estate (IYR) 59.74 -1.9% +6.3%
Industrials (IYJ) 68.01 -2.1% -2.3%
Transportation (IYT) 90.69 -2.0% -2.7%
Biotech (PBE) 21.25 -3.6% -3.1%
Media (PBS) 14.46 -2.6% -3.3%
Internet (HHH) 70.21 +0.1% -3.8%
Defense (PPA) 19.20 -1.8% -4.1%
Insurance (PIC) 15.95 +0.0% -4.2%
Financials (IYF) 55.75 -2.1% -4.6%
Software (PSJ) 25.82 -2.2% -4.6%
Construction (PKB) 13.23 -3.2% -6.9%
Telecom (IYZ) 21.41 -2.0% -7.3%
Water (PHO) 18.22 -1.9% -8.3%
Oil Service (OIH) 121.00 +2.4% -11.4%
Semis (PSI) 15.18 -1.6% -12.8%
Basic Mat (IYM) 66.85 -1.9% -17.2%
Nanotech (PXN) 6.17 -1.9% -34.5%
Alt. Energy (PBW) 5.05 -1.4% -50.1%

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