How to Invest in Natural Gas: 25 Actionable Ideas2015-06-24
Natural gas investing is an incredibly popular and active sector of the commodity world, as its high volatility, as well as robust growth predictions, make it a candidate for all kinds of investors. As a trading tool, natural gas tends to exhibit violent daily swings with high and liquid volumes.
While this can lead to significant losses, for those who play their cards right, trading natural gas can make for a nice short-term reward. For the more traditional buy-and-hold investor, there are still a number of options that may not directly invest in the commodity, but offer significant exposure under a safer structure.
No matter what kind of investor you are, there is certainly a natural gas option that fits your investment style. Below, we outline 25 ways to invest in natural gas to help investors pick the correct security for their portfolio.
Futures were the original method for obtaining exposure to commodities. These contracts can be difficult to understand and require a rather complex futures account, so they are not meant for the average investor. For those who fully understand the nuances of these contracts, futures can be one of the most powerful trading tools, as they offer exposure that, in some cases, can be found nowhere else in the market. The following futures contracts are offered on the NYMEX at the CME Group [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]:
- Natural Gas (NG): These Henry Hub futures contracts, which are also optionable, are the most popular for establishing a futures position in this commodity. One contract represents 10,000 million British thermal units (mmBtu).
- Henry Hub Natural Gas Last Day (HH): Also known as the look-alike last day financial futures, these contracts represent 10,000 mmBtu, and the futures settle on the last trading day of each contract month.
- E-mini Natural Gas (QG): These contracts are not optionable, but represent just 2,500 mmBtu, allowing for smaller investors to still make a strong play on their favorite fossil fuel.
Investing in the equity side of the equation isn’t a pure play on natural gas, but it can make for a number of interesting opportunities that other investment vehicles simply don’t offer. Equities that focus on this commodity will most often consist of exploration, pipeline, or refining companies that can offer a number of advantages over other options. A fair amount of these companies offer strong dividend options and high liquidity for traders of all kinds [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].
- Exxon Mobil (XOM): Though this firm is most well-known for crude oil production, natural gas production and pipelines amount to a substantial portion of itsbusiness.
- Devon Energy Corporation (DVN): Devon has its hands in just about every corner of the natural gas market and there is a lot of speculation that it will move further in to LNG in the coming years.
- Chesapeake Energy (CHK): Natural gas production accounts for the majority of Chesapeake’s business model while the rest comes from crude oil. With natural gas production dominating crude oil, CHK allows investors to make a stronger play on the commodity while hedging the risks with some crude oil exposure.
- Cimarex Energy (XEC): This oil and gas exploration/production company is in the business of finding new resources for extraction. Given that there is still a fair amount of natural gas waiting to be tapped into, XEC has a good upside potential.
- Cabot Oil & Gas Corporation (COG): Stationed in Houston, Texas, this company is an independent oil and gas firm that develops, exploits, and explores oil and gas properties in North America.
- Range Resources Corporation (RRC): Another Texas-based company, Range Resources engages in exploration and production of the commodity in the Appalachian and Southwestern regions of the U.S.
- EOG Resources (EOG): EOG spans its operations from nations like the U.S. and Canada, to the Republic of Trinidad and Tobago, and China making for a more global play than the previously mentioned securities.
Exchange-Traded Funds (ETFs)
ETFs have been extremely effective for helping to spread commodities to a number of different investors. While it used to be that only futures traders had access to this asset class, ETFs have helped the average Joe gain exposure to something like natural gas producers with just one simple fund. When it comes to natural gas, there are ETPs with various investment objectives to give investors exposure to more than just plain-vanilla futures contracts [see also Four Little Known Factors Driving the Price of Natural Gas]:
- United States Natural Gas Fund LP (UNG): This ETF invests in front-month futures contracts for natural gas and is by far the most popular fund for this commodity.
- DJ-UBS Natural Gas Subindex Total Return ETN (GAZ): This fund is nearly identical to UNG except that it utilizes the ETN structure, meaning it won’t incur tracking error but it will be at the credit risk of its issuer.
- United States 12 Month Natural Gas Fund (UNL): UNL is an ETF that holds natural gas contracts for several months out, spreading exposure from the usual front-month strategy, which has led to much criticism for products like UNG.
- VelocityShares 3x Long Natural Gas ETN (UGAZ): UGAZ offers a 3x exposure to an index composed entirely of natural gas futures contracts, derived by reference to the price levels of the futures contracts on the commodity as well as the discount or premium resulting from “rolling” hypothetical positions in such contracts forward as they approach delivery.
- VelocityShares 3x Inverse Natural Gas ETN (DGAZ): This fund is similar to UGAZ, but offers a -3x exposure to the same underlying index.
- Seasonal Natural Gas ETN (DCNG): This ETN maintains an unleveraged investment in a rolling position in Henry Hub Natural Gas futures contracts plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
- UltraShort DJ-UBS Natural Gas (KOLD): This product will seeks to return -200% of its underlying natural gas contracts. While it is a dangerous investment, for traders who have done their homework, this can be a very powerful tool.
- Ultra DJ-UBS Natural Gas (BOIL): This fund is simply the 2x version of KOLD, and will return 200% of its underlying natural gas contracts. Same goes for this fund, do your homework before investing.
Master Limited Partnerships (MLPs)
While MLPs technically belong under the stocks section, their unique makeup and juicy yields warranted them their own segment on this list. Over the trailing decade, the Alerian MLP Index “of 50 prominent MLPs has outperformed REITs, the Dow Jones Industrial Average, utilities and the S&P 500” writes Ed McCarthy. These partnerships focus on oil and natural gas pipelines, as they build new and upkeep the current infrastructure for much of the world’s energy usage. The funds often come with extremely enticing dividend yields that make them ideal for value investors. Note that owning individual MLPs can have adverse effects come tax season so investors should be cautious when buying one of these high-yielders [see also MLPs: CEFs, ETPs, or Mutual Funds?].
- Kinder Morgan Energy Partners LP (KMP): An investor favorite, Kinder Morgan operates more than 15,000 miles of natural gas pipelines.
- Inergy, L.P. (NRGY): Though this stock is not as popular as some of the other pipeline firms on the list, its business model of owning and operating a growing midstream natural gas and natural gas liquids (NGL) business should be considered for your portfolio.
- Boardwalk Pipeline Partners, LP (BWP): Boardwalk Pipeline Partners LP provides transportation, storage, gathering and processing of natural gas and liquids through its constantly expanding pipelines and storage caverns. [see also Analyzing Five High Yielding Oil & Gas Pipeline Stocks].
- Enbridge Energy Partners LP (EEP): Based in Houston, Texas, Enbridge is home to a natural gas treatment plant, 10 processing plants, and approximately 4,600 miles of gas pipelines.
- Energy Transfer Partners LP (ETP): Founded in 2002, this firm has a number of processing, treatment, and conditioning facilities dedicated towards this commodity.
- Natural Resource Partners LP (NRP): Natural Resource is principally engaged in the business of owning and managing mineral reserve properties including coal, aggregate, and oil and gas reserves across the United States that generate royalty income for the partnership [see also Dividend Special: Four Commodity Stocks Yielding Over 5%].
- Buckeye Partners LP (BPL): Though BPL is one of the smaller companies on this list, they span their operations over 15 states, giving them a wider reach than the majority of the aforementioned firms. This company provides logistics and transportation services for refiners, wholesalers, airlines and other commercial en-users of natural gas and petroleum products.
Disclosure: No positions at time of writing.