Nat Gas Futures May Be Bottoming


"A bottoming may set the stage for a multiyear advance."

Amid widespread low expectations for natural gas price, we see signs of a bottoming that may set the stage for a multiyear advance. For more than four consecutive weeks, seasonal inventory build has been slower than normal. The positive wiggle in the inventory line follows a flat trend for one-year futures price roughly near $5/Mbtu since the spring of 2009.

Eric Miller, long-time colleague in decades past and respected investment strategist, impressed on us that a long basing period after a decline may indicate there is little more selling to be done and that new buying may drive price up. Price patterns aside, the fundamental case for natural gas as the most economic clean fuel has rarely been stronger. Also we are at peak political uncertainty in the second year of the presidential cycle ahead of midterm elections. That uncertainty is usually followed by better stock prices in the next two years.

Positioning for the future, investors can choose attractive natural gas ideas among income and small-cap stocks by weighing concentration of present value in the natural gas segment, income yield and McDep Ratio, among the most important considerations. With notable exceptions, income and small-cap stocks offer more natural gas concentration than large-cap stocks.

Once a quarter, usually after the distribution declaration for the second month of the quarter, we roll forward our Next 12 Months period by three months. Today's estimates of distribution yield are for the year ending September 30, 2011. . .Because futures prices that we use for our estimates have a rising slope with time, the quarter added at the future end of the period usually has a higher price for oil and natural gas than the quarter dropped and at the present end of the period.

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