Over these last few months, it has undoubtedly been a frustrating period of time if you are a ‘value’ investor. Very few markets have been passed over by the long boom in cheap credit, which has spilled excess liquidity into massive pools of capital. In turn, those pools of capital have combed the world over, in an ongoing quest to seek hidden values driven by a seemingly unquenchable thirst for ever greater levels of asset inflation, and ever greater levels of total return.
Amid all of this hedge fund arbitrage, it is possible that some stone has been left unturned by the performance gods of global capitalism? In our view, while it is hard to believe, we do see pockets of “good value” remaining within the Energy Sector. Yes, we know that Oil Shares are still not expensive on a fundamental P/E metric, and in light of the coming age of Peak Oil, in all likelihood, we will all look back one day with fondness on the “low price” of Crude Oil near $73. “Remember the time when Crude Oil cost less per gallon than Milk?” That will probably be a common refrain. Yet, Oil Stocks have had an enormous advance in the last few months, and will undoubtedly not fair that well in a more generalized market decline, that is, IF a decline of substance ever materializes.
Despite cheap P/E’s, both Oil and Oil Service stocks could become a victim of their own recent success, as equity fund managers could be tempted to hit the “take profits” button on Energy, if other segments of their portfolio begin to act poorly. Surely, this would never happen with professional money managers you say? Don’t kid yourself. All too often equities with big gains can become the ‘redemption bank” of first choice for managers who are being forced to sell equities and raise cash. Thus, despite our longer term fondness for Energy Stocks, at the moment, it is hard to belly up to the bar with the XOI up a hefty 34% since the mid-March low, and the OSX up an even more impressive 39%.
So where does one find “Value” in Energy at the present time? Our answer: Natural Gas. For a time, we were tempted to title this article: “Got Gas?” But then we thought better of that idea. Hence the more conservative approach shown above. Nevertheless, having Gas could be just the ticket over the next few months if you are in the market for solid investment gains. Mind you, we are not talking about Gas Stocks, No, No, No! We are strictly interested in gas -- the commodity. So why Gas? Well, Gas is cheap. How cheap? Answer: Very cheap, and therein lies the opportunity.
We start our discussion of cheap gas prices by acknowledging that a barrel of Oil has about six times the energy content of a thousand cubic feet of Natural Gas. Although the two commodities are far from perfect substitutes, there are any number of companies that can switch between Oil and Natural Gas depending on price and availability. A goodly portion of the US Electrical Utility Industry has this capacity with Natural Gas, a clean burning fuel of choice.
The graph below shows the price of Oil (West Texas Nat Gas Wellhead $/1000 cu ft and West Texas Intermediate Crude $/barrel) and is a fair representation of the historical relationship between the two commodities.
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