It’s Funny What the Markets will Make You Root For

by JT McGee

I really dislike extreme weather. Hot weather is awful, cold weather is a little less awful. I figure there’s no limit to how much you can layer in the cold, but there’s absolutely a limit to how much a decent person can take off in the summer.

Either way, I’m not too fond of weather hot or cold. That is, until I have money on the line.

Let It Snow, Let It Snow

The funny thing about investing is that it forces you to root for teams you might not otherwise like. This year, I’m rooting for the bitterly cold team. I want months upon months of freezing cold temperatures.

Why?

Because natural gas prices need it.

Over the summer and into the winter I’ve been buying shares of Apache Corp., and oil and gas exploration company. I like it for any number of reasons – it’s cheap, people are worried about it (lots of cash flow comes from troubled Egypt), it has tremendous amounts of potential in its newly acquired assets, etc. Most importantly, I like it because it’s doing the opposite of what other companies are doing. It’s growing when all other companies are just paying out cash flow in dividends. So it’s a contrarian oil and gas play. The Street isn’t too fond of it, so I’ll love on it a little.

Anyway, one of the bigger problems for it now is the supply side problems in the oil and gas industry. In case you’re not aware, fracking is the best thing to ever happen to the United States. We have tons of oil and natural gas – and we’re stockpiling it quickly. Supply boom turned to bust as oil and gas prices have dropped precipitously.

Natural Gas Supplies

Historically, natural gas piles up during the summer, and then it gets used up during the winter because cold people like to have warm homes. So the trend is pretty seasonal. In 2011, though winter didn’t come. It just didn’t.

Check out the trend:

So natural gas built up. And it got so cheap this summer that it was used to make electricity because hot weather requires air conditioners, which run on electricity. Natural gas can be economically turned into electricity when its under $3. That trend started in April, when natural gas prices bottomed under $2.

Anyway, the long and short of this story is that sometimes when you make an investment you have to be willing to root for things you don’t necessarily like. For me right now, with a growing part of my portfolio in cash (I’m only buying one stock, and it’s a thinly-traded Pink Sheet), cold weather is my current desire.

Bring on the cold, baby! Let it snow, let it snow, let it snow!

{ 6 comments… read them below or add one }

tom December 18, 2012 at 19:09

You need to be rooting for rain and snow, not just cold. The Mississippi River water is in high demand and being pulled in 2 main directions (not literally of course 😉 ). On one hand, the low water level is creating issues for barges getting down the river. River barge operators are demanding up stream reservoirs release reserves, but the oil and gas industry are demanding that water be used for fracking operations in the Dakotas.

Both sides have a lot of clout, so start cheering for precipitation!

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JT McGee December 18, 2012 at 20:32

Yeah, really. West Texas/Oklahoma needs rain really badly, too. I’m most concerned about the Permian/Andarko basin and what’s going on down there. It’s really incredible how how much oil and gas/liquids we have in this country.

I vote with the barges. Cut North Dakota’s plays off for a little bit…that’d actually be good for me. 😉

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PK December 19, 2012 at 11:52

I join you on this one, as you know. How about country to country differences in natural gas prices? Any commentary on how APA should play it? Sell all the gas to China?

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JT McGee December 19, 2012 at 13:58

Country to country differentials are huge. That’s why I like Apache’s Egyptian plays…sure, it’s speculative at the worst, but it’s also a market where natural gas is pretty expensive. Makes for good cash flow right now. I think risks to that particular segment are overblown.

Apache is already selling to Asia via Australia. It has a big 40% interest in a potential Kitimat project in BC to convert output to LNG for arbitraging foreign markets. It’s not yet known if they’ll go through with that, and I really don’t think it’s all that important. Everyone is building LNG export facilities. Frankly, I’m not sure how much it will really matter at the margin. If all these liquefaction plants are built as expected, the geo-arbitrage for pricing goes from amazing to okay. I mean, prices are high in Asia because no one is shipping LNG yet. If all these projects come on line, that spread is going to get arbitraged away. High capex with unknown, very cyclical rewards. Sounds like airlines. The pricing Shell worked on its liquefaction plant sucks…based on gas, not oil. So I wouldn’t mind if Apache didn’t chase it down the rabbit hole.

All in, Apache’s future is going to be mostly US-based production of liquids, a lot of it all oil. And that world market is already there without the capex necessary to create a world market for gas/LNG. I see the exporting facilities ultimately putting a price floor in for natural gas, but the switch from coal to nat gas for electricity already does that without the capex. Those LNG facilities are still years away, and Apache will generate its market cap in OCF by the time the first one opens. I like that cheap cash flow.

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Financial Samurai December 21, 2012 at 14:01

I hope you make bank. One of my biggest financial losses was betting on a company called GasStar. I think I lost around $25,000! OUCH!

Shoulda gone to the WSOP for $10K buy in, and spent another $15K on bottle service and fun times! haha

Reply

Wayne @ Young Family Finance December 26, 2012 at 21:54

It’s also interesting how your routing may also be the opposite of how most consumers bet. I generally feel conflicted about buying oil stocks because I want to route for only lower prices.

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