Overweight Natural Gas Stocks: Tristone Capital


Investors should overweight natural gas stocks in their portfolio right now, says a specialized oil and gas brokerage firm in Calgary, Alberta.

In a June 4 report, Tristone Capital says investors who wait to invest in natural gas stocks until the natural gas commodity price bottom in late summer – and they hold out the potential for US$3 gas or less – will miss out on a lot of capital gains.

It is the loudest bold call yet from financial industry I have seen yet this year on natural gas. Essentially, they are saying the bottom is in on natural gas stocks. They see an imminent supply decline, starting in July and accelerating quickly, because the North American rig count has dropped so much.

The natural gas rig count has gone from 1600 a year ago to 700 today in the US.

Tristone estimates the natural gas market is now 2-3 bcf/d (billion cubic feet per day) over supplied, but they expect gas production to fall by over 500 mmcf/d per month between now and the new year, with supply down 5.5 bcf/d by late Q1 2010 and 7 bcf/d by next spring.

Just like OPEC, that will take a lot of discipline by the many natural gas producers in the industry, particularly the juniors and intermediates that are cash flow starved and near their debt limits.
Tristone is forecasting a $6.75/mcf NYMEX gas price for 2010.

As yet, the drastically lower rig count in the US has not meant a drop in natural gas supply. The reason is that the number of rigs in the 3 prolific US shale gas plays – Haynesville, Marcellus and Fayetteville – is still increasing. So the newest, most productive rigs are active in the most productive formations, and delaying the supply drop, the report says.
Better rigs and more productive formations has increased the efficiency of rigs some 30%, Tristone adds, saying the average rig produced 9.7 mmcf/d at the beginning of 2007, and that’s up to 12.5 mmcf/d today.
But they contend the supply drop will happen, and soon.
The charts on natural gas stocks have been saying this for several weeks, as I showed on the previous article on Storm Exploration (SEO-TSX). And other brokerage firms have said the drastic rig drop will result in a sharp sudden increase of natural gas prices when the supply decline finally begins in earnest.
So if you believe this theory, in which natural gas stocks should you invest? Tristone says the senior gas stocks are fully valued, and the mid-caps are the best buys now.
I will outline some of the natural gas stocks in my portfolio in one of the first issues of my newsletter. I hope to be offering my subscription service for the investment newsletter by the third week of June.