SET Monthly Issue June 2016
WAITING FOR THE NATURAL GAS REBOUND
Erath, Louisiana is in Vermilion Parish, the heart of Cajun country. It’s home for 2,200 people, Big John’s Seafood Patio, and The Henry Hub. The Henry Hub is the crossroads of America’s natural gas pipelines.
Nine interstate and four intrastate pipelines come together in Erath, and it’s such an important spot that Henry Hub lends its name to the price for natural gas futures contracts.
These futures are the #1 factor that drive unregulated North American wellhead prices for natural gas. And since 2008, Natural gas prices have been stuck in a bear market that hasn’t let go.
But there’s change in the air, and this change is why we’re recommending the First Trust ISE-Revere Natural Gas Index Fund (FCG).
NATURAL GAS INVESTMENTS HAVE BROKEN A LOT OF HEARTS
Over the past year, the fund was mauled by low energy prices and the warm autumn and winter weather. But looking beyond the weather over the next month, this is a good entry point. With producers poised to ship liquefied natural gas overseas, we see export volumes rising.
Natural gas pricing is historically twitchy. When weather forecasters call for cooler than normal temperatures for a time frame as short as the next few weeks, traders on the New York Mercantile Exchange react and gas prices edge up.
And vice versa. It’s a nerve-wracking commodity, highly sensitive to non-stop, short-term factors.
Natural gas prices peaked in the middle of 2008. In less than a year, they plunged by 80%, and since the middle of 2009, they’ve skidded even more.
Check out this ten-year chart for some pricing perspective, and you’ll see that natural gas prices have been in a holding pattern for the past four years…
This chart shows the prices for an ETF that tracks prices. It’s the United States Natural Gas Fund, LP (UNG). The trading price reflects actual natural gas wholesale prices.
But we believe there’s a better ETF for investors who believe that this holding pattern is coming to an end, and that natural gas prices are ready to rebound.
We like The First Trust ISE Revere Natural Gas ETF (FCG) which tracks an industry index instead of the actual commodity price.
Thirty companies make up this index. They’re focused on natural gas production and exploration.
Most of these companies are smaller independents, and virtually all of them have taken a beating over the past ten years. You could look long and hard and not find an American industry that’s been mauled like the natural gas business.
But the tough times of the past ten years means that the well-managed firms have been looking for more cost efficient ways to find, store, and transport gas.
In 2008, it took 1,560 rigs to produce 2.9 trillion cubic feet of shale gas.
Today, it takes just 189 rigs. And they actually produce more than 12 trillion cubic feet.
It’s sort of like what we’ve seen with computer chips… lower prices, greater power.
This ability to produce such a high volume of natural gas is a key reason why supplies have grown exponentially. Demand simply hasn’t been able to keep up, and that’s why prices have been stuck in neutral for eight years.
Why do we think something’s about to give, and that the supply and demand scenario will change? Why do we think natural gas prices are about to start edging back up?
Three factors come into play… Coal, exports, and pipelines.
THE IMPACT OF COAL
Coal has become highly politicized in this year’s national election campaign. But no matter what side of the political fence you’re on, the future of coal looks grim.
Regulators are cracking down on carbon emissions. Natural gas makes more economic sense for electric power plants than coal. The big electric utilities are buying less coal and more natural gas. The trend is firmly in place for natural gas to replace coal as the leading source of U.S. power generation.
THE IMPACT OF EXPORTS
Industry analysts are forecasting a 20% hike in demand for U.S. natural gas by 2020.
Most of this gas will go to Europe and Asia. Asia imports 30% of its gas right now and this is expected to double by 2040. The U.S. is in the catbird seat to quench this thirst.
THE IMPACT OF PIPELINES
Right now, despite impressive facilities like Henry Hub, Louisiana, America’s natural gas pipelines aren’t as efficient as they could be.
But bottlenecks are being removed, and $20 billion is already being invested in the transmission infrastructure. Safety procedures for storage are improving.
WHY WE BELIEVE NATURAL GAS PRICES ARE READY TO SOAR
Coal, exports, and pipelines are the key factors. And we also have a straightforward story of supply and demand. For years, supply has outstripped demand. Time and time again, just when investors have felt natural gas prices are ready to go up, something happens that keeps prices down.
But there’s a significant and fascinating trend underway.
The total supply of dry gas production, including the gas we import, has been going down since October 2015. The reasons why… flat production, lower imports, and rising exports. We’re also witnessing a slowdown in growth of shale gas.
What does this mean? The excess supply is vanishing. America has had a natural gas surplus since December 2014. What happens next, according to U.S. Federal Government forecasters, is a deficit by Fall. Analysis and research in The Short Term Energy Outlook calls for a major tightening of supplies.
Right now, we’re ahead of the curve. The full impact has not been felt.
Many of the investors who have reviewed these forecasts are skeptical. Natural gas prices have been more or less imprisoned in a brutal bear market since 2008.
What makes this time different? Long term-trends are more firmly in place.
THE ETF’S OBJECTIVES
The First Trust ISE-Revere Natural Gas Index Fund (FCG) is designed to deliver results tied to the price and yield of the ISE-REVERE Natural Gas Index.
The top five holdings and percentage weight for FCG:
| Company Name | Ticker | % Weight | ||||
| Devon Energy Corp. | DVN | 6.25 | ||||
| Pioneer Natural Resources Co. | PXD | 5.54 | ||||
| Anadarko Petroleum Corp | APC | 5.52 | ||||
| Hess Corp. | HES | 5.29 | ||||
| Apache Corp | APA | 5.01 | ||||
| 06/03/16 | ||||||
A Closer Look At The Top 5 Holdings
Devon Energy Corp.
Devon explores, develops, and produces oil, natural gas, and natural gas liquids in the U.S. and Canada, along with transmission and marketing.
Pioneer Natural Resources Co.
Pioneer produces and sells oil, natural gas liquids (NGLs), and gas. It has operations primarily in Texas and Colorado.
Anadarko Petroleum Corp.
Anadarko is involved with exploration, development, production, and marketing of oil and gas properties.
The oil and gas exploration and production segment explores for and produces oil, condensate, natural gas, and natural gas liquids (NGLs).
Hess Corp.
Hess is a global exploration and production company. It develops, produces, purchases, transports, and sells crude oil, natural gas liquids, and natural gas. Hess has significant operations with the Bakken shale play of North Dakota.
Apache Corp.
Apache explores, develops, and produces natural gas, crude oil, and natural gas liquids. It operates onshore and offshore and focuses operation on Texas and western Oklahoma.
Trade Alert
Buy: First Trust ISE-Revere Natural Gas Index Fund (FCG) up to $26.70
Recent Price: $25.90
Price Target: $37.00
Stop Loss: $23.80
SECTOR SPOTLIGHT
Over the past few months, we have grown increasingly bullish on the prospects for the energy sector. Last month, we recommended small cap producers with a significant upside, and this month, it’s natural gas.
When we took a look at overall market sector performance earlier this month, we noted that the two worst-performing sectors year-to-date at that time were Financial Services (-5.86%) and Health Care (-4.01%).
Since then, each has improved.
For all the noise about technology, and the woes of IBM, Intel, and Apple, the tech sector has held up fairly well. It’s now in the black for the year, up 2.78%. It’s interesting to note that many of the top performers in tech have been smaller stocks. Nvidia develops graphic processing units and focuses on computer game technology.
When we work our way through the list of individual stocks that keep tech in the sector performance game, a surprising name turns up, a company that’s been around since 1851… Western Union.
We’ll be keeping an eye on the tech sector for a good opportunity. We are monitoring more than 40 different ETFs right now. Some have posted double-digit losses this year, and one has actually posted a double-digit gain.
YEAR TO DATE SECTOR PERFORMANCE
| Consumer Discretionary | XLY | +1.47% | ||||
| Consumer Staples | XLP | +6.20% | ||||
| Energy | XLE | +12.75% | ||||
| Financial Services | XLFS | -1.91% | ||||
| Financials | XLF | -0.76% | ||||
| Health Care | XLV | +0.90% | ||||
| Industrials | XLI | +6.62% | ||||
| Materials | XLB | +10.89% | ||||
| Real Estate | XLRE | +2.81% | ||||
| Technology | XLK | +2.78% | ||||
| Utilities | XLU | +15.55% | ||||
PORTFOLIO UPDATES
. . . . PowerShares S&P SmallCap Energy ETF $PSCE – HOLD
We are pleased that our focus on small caps has worked out well with the rebound of energy stocks across the board. In the past month, it’s delivered a 10% gain.
The price target is $17.50. Continue holding.
. . . . First Trust NASDAQ Community Bank Index Fund $QABA – BUY
QABA has given up some gains, but is still above our buy up price of $38.00
If there is dip because of delays in anticipated interest rate increases, acquire while you can… the price target is $46.00.
. . . . Aberdeen Chile Fund $CH – HOLD
The ETF has regained some of the recent it lost, and remains above the buy price of $5.73.
The price target is $11.00. Hold.
. . . . SPDR S&P Homebuilders $XHB – HOLD
The sector has been buoyed by increases in new home construction, and the ETF is reflecting this. Delays in anticipated interest rate hikes provide an additional, and somewhat unexpected, benefit.
The price target is $50.00. Continue holding.
. . . . iShares Medical Devices ETF $IHI – HOLD
$IHI is now benefitting from a turnaround in the performance of both the health care and tech sectors.
The price target is $140.00. Continue holding.
. . . . Utilities Select Sector SPD $XLU – HOLD
Continue holding. Utility stocks remain attractive for cautious investors seeking yield.
Portfolio Changes
- This month we’re buying First Trust ISE-Revere Natural Gas Index Fund ETF (FCG) up to $26.70.
Category: SET Monthly Issues
