Is Natural Gas A Worthy Investment?
Sara Nunnally: Over the past week and more, we’ve been talking about crude oil, crude oil and crude oil. And for good reason. Oil prices jumped above $97 a barrel in after-hours trading on Friday. This industry is so important — and so riddled with corruption and greed — that Sandy Franks and I wrote a book about it. Barbarians of Oil is already on shelves, but you can get a big discount off the shelf price by visiting this link.
But while we’ve been talking about crude oil, natural gas has quietly crept back onto the investment scene. In fact, natural gas prices climbed six out of the past seven trading days.
So we’re asking, “Is natural gas a good investment right now?”
There are certainly a lot of news stories that say yes… Most of them involve China.
China wants to double its methane gas production by 2015. This form of natural gas comes from coal beds, and PetroChina (NYSE:PTR) says the country has enough to meet 30% of its power needs.
But right now, China relies on crude oil and coal for its power needs. That’s expensive and dangerous. China’s the second biggest user of oil in the world, with imports skyrocketing. In the coal industry, small, unregulated mines kill thousands of people every year.
That’s why China is desperate for natural gas.
The problem is, China fell short of its production target last year. It wanted to produce 10 billion cubic meters, but finished with only 8.6 billion.
There’s real doubt that China can meet its goal of producing 21 billion cubic meters a year by 2015. China needs international projects to add to the mix.
China is investing billions in natural gas.
According to David Hurd, oil and gas analyst for Deutsche Bank, China invested $10 billion in unconventional gas deals between August 2010 and February 2011. Things like shale gas…
One of the biggest deals was with Canada’s Encana Corp. (NYSE:ECA).
Here’s a little background.
In February 2011, PetroChina agreed to pay $5.4 billion for a 50% stake in natural gas deposits in Western Canada. These deposits are owned by Encana, and they are shale gas — the most difficult type of natural gas deposit to tap.
China was very interested in this deal because it wanted to learn better ways of extracting shale gas. It could then use these methods to tackle its coal-bed methane deposits.
It hooked up with the right company. Encana is considered one of the best in the business…
But suddenly, on June 22, Encana announced the $5.4 billion deal was over. The two companies couldn’t agree on key points about the deposits. Encana is now looking for another company to partner with.
China has lost out on 255 million cubic feet of natural gas a day, or 7.22 million cubic meters. That deal would have boosted China’s natural gas production by 2.64 billion cubic meters a year… a jump of 30% over 2010′s production!
But even though this massive deal fell through, there are still a lot of deals going on right now.
The latest news comes from Shell (RDS.A:NYSE). Shell could partner up with China National Petroleum Corp. (PTR’s parent company), Korea Gas Corp., and Mitsubishi Corp. (MBI:XETRA MSBHY.PK) to build a liquefied natural gas (LNG) facility in British Columbia.
Shell has a pretty close relationship with China National Petroleum Corp. In November 2010, these companies signed an agreement for “integrated cooperation.” This would allow more collaboration between the two companies on oil and gas projects in Canada, and coal-bed methane project in China.
But that’s not all…
Shell signed a “shareholders agreement” with China National Petroleum Corp. in late June. The agreement was for a 50-50 joint venture “meant to accelerate large-scale development of shale gas, tight gas and coal bed methane through the standardization and automation of drilling,” according to LNG World News.
In all, deals between China and Western Canada could get even hotter, and the rest of Asia isn’t about to be left out in the cold. Progress Energy Resources Corp. (TSX:PRQ) inked a $1.07 billion deal with Malaysia’s Petronas.
Even more interesting, though, are U.S. companies making deals with Canadian companies. EOG Resources (NYSE:EOG), Encana and Apache (NYSE:APA) are the companies behind Kitimat LNG. This project is working its way through government review right now.
What you need to know is this: There is huge potential in natural gas investments… even more when you throw China into the mix.
Look for a lot more deals to come in this industry. The players could be from China and other Asian countries (like Japan, Korea and Malaysia), or even places like Australia.
In fact, one of Australia’s biggest companies just agreed to buy out an American natural gas producer.
New Growth Investor editor Zach Scheidt was all over this acquisition, and recently wrote me to say:
In “The Energy Titans of Growth” I recommended a purchase of Petrohawk (NYSE:HK) because of the company’s ample reserves.
You see, the company is sitting on 3.4 Tcfe (Trillion cubic feet) of proven reserves.
Of course, proven reserves are only part of the company’s actual asset base. A significant amount of acreage has yet to be fully analyzed and documented. These acres are listed as “resource potential” — and will likely be converted to proven reserves as the company continues to expand its drilling program.
At the time the report was issued, HK was trading near $27 per share. The stock has been volatile due to a very uncertain energy market. But HK’s reserves have never been in question.
Today, HK is trading 62% higher (overnight) because BHP Billiton (NYSE:BHP) agreed to acquire the company for $38.75 per share. BHP made the acquisition because of HK’s tremendous reserves. In this transaction, HK provides the gas assets that BHP so desperately needs, and BHP provides the drilling infrastructure and financing to quickly ramp production and increase profits.
It’s a win-win situation. HK shareholders get a 62% windfall, and BHP shareholders now have a tremendous gas asset that could pay dividends for years to come.
It seems as though companies with spending money are trying to snap up as much natural gas as they can.
And that means the natural gas industry is a very worthy investment right now.
http://etfdailynews.com/2011/07/18/is-natural-gas-a-worthy-i…