Natural gas prices might be hovering near historic lows, but that doesn't mean investors should shy away from the distribution, exploration and production end of the industry.
“Right now, the natural gas industry is in a sweet spot,” according to Skip Aylesworth, manager of the $300 million FBR Gas Utility Index Ticker:(GASFX).
The index, which tracks the American Gas Association Stock Index, has proved to be an effective diversifier for broad market equity exposure.
So far this year, the index is up 6.3%, which compares with a 10.7% decline for the S&P 500.
Since the start of August and some of the most extreme market volatility in recent memory, the natural gas index has declined by 6.9%, which compares with a 13% decline by the S&P 500.
Part of what is driving the natural gas index is such highfliers as EQT Corp. Ticker:(EQT), an integrated-energy company that has seen its stock price climb more than 17% from the start of the year.
National Grid PLC Ticker:(NGG), an operator of gas infrastructure networks in the United States and the United Kingdom, has seen its shares climb nearly 16% this year.
As Mr. Aylesworth explained, the strength of many of the companies in the index these days can be attributed to new exploration and production technology that has streamlined the process while also adding to the supply of the commodity.
“By using new technology, a lot of companies are now going back to old areas of the country and finding new gas,” he said. “Some of these companies have found themselves sitting on huge natural gas reserves.”
As a result of the new exploration technology, 25% of the 61 companies in the index now have an exploration component. Five years ago, not one company in the distribution-focused index had one.
Even though the price of natural gas has been hovering around $4 per billion British thermal units, or about half the average price over the past 10 years, Mr. Aylesworth said there are outside factors driving the stock prices higher.
“The last two or three, we've found an awful lot of natural gas in this country, and that has kept the prices [of the commodity] low,” he said. “But the low price is also bullish for the industry because it will eventually increase the demand for it.”
Part of the anticipated appeal of natural gas, he added, has to do with the fallout from the nuclear disaster in Japan, the dirty downside of coal, and the inadequate production of alternatives such as wind and solar.
The American Gas Association Index was founded 25 years ago to represent the distribution side of the natural gas industry. Being a member of the association means automatic inclusion into the index, which had as many as 125 companies in the late 1980s before consolidation took over.
A company's weight in the index is based on market capitalization with an adjustment for the percentage of assets per company devoted to natural gas.
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