Natural gas investing is unpredictable, but selecting stocks with strong management, a healthy balance sheet, plus rising gas production and reserves will help you lower that risk

Natural gas demand remains high. Pipeline exports to Mexico from the U.S. remain strong, as do exports of liquefied natural gas (LNG) from that country, especially to China. Consumption in the chemical industry continues to grow, and utilities are shifting toward fast-cycling natural gas plants to complement increasing amounts of intermittent renewable power.

However, at the same time, natural gas output has kept pace. Fracking and other new technologies have made it possible to produce oil and natural gas in larger quantities than ever before, in all sorts of places that had never seen significant production.

Natural gas prices will likely remain steady in the near term—but longer term, the outlook is more positive. Here’s a look at some of the factors that will influence prices—and stock picking in this industry.

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Natural gas investing and environmental concerns

Resource companies, including energy producers, do sometimes turn out to have hidden environmental liabilities, as do companies in other sectors. But the top stocks in the sector also create their own hidden assets. They accumulate rights to promising drilling sites long before the land rush starts. They have the technical and political skills they need to foresee and deal with environmental and political obstacles.

Environmentalists mostly oppose projects that would help build natural gas exports. They would prefer to leave the gas in the ground, and expand wind and solar power. However, wind and solar are poor substitutes for gas. They provide only intermittent sources of power and they require heavy subsidies.

How the industry has developed, making natural gas investing a viable option

The natural gas industry continues to expand its efforts at winning approval for building new pipelines and expanding shipping facilities for liquefied natural gas (LNG). These projects let producers ship more of their surplus gas overseas, where natural gas prices can be two or more times higher than in North America.

Regulators, particularly in the U.S., are coming around to the view that if North American gas producers can sell in foreign markets, they will create jobs, and so raise the tax revenue.

However, it is important to realize that natural gas investing is highly unpredictable  

The price of natural gas, like the price of oil, is highly unpredictable—and influenced both up and down by a wide range of factors. So it’s a bad idea to base investment decisions on predictions of future natural gas prices.

The resource sector, including natural gas companies, is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up.

This expands profits at energy companies, in particular. When the economy slumps, those energy prices fall, and this drags down profits and stock prices.

In addition to rising and falling with the business cycle, energy stocks have a history of rising along with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

Tips for natural gas investing  

• Find stocks with strong balance sheets.
• Look for well-financed companies with no immediate need to sell shares at low prices.
• Find stocks with low debt.
• Look for stocks with operations based in secure and politically stable regions.
• Look for an experienced management team with a proven ability to develop energy projects.
• Look for stocks based in countries with respect for property rights and the rule of law.
• Avoid any energy investments that trade “over the counter.”
• Don’t invest if the stock is trading at an unsustainably high price.

Given our Successful Investor philosophy, we continue to advise against overindulging in natural gas investing or any other type of stock. That’s because the Resource sector is highly volatile, and no one can accurately predict future prices. Gas shares are subject to various environmental regulations and royalties that can eat into their profits.

However, you can profit nicely over long periods by investing a reasonable portion of your Successful Investor portfolio in well-established or well-managed resource stocks, including natural gas producers, especially those with high-quality reserves and rising production. These companies are well-positioned to profit during periods of high prices, and are at least able to partly offset price declines by producing more.

Investors should also seek out gas company stocks that have vast exploration areas or technology advancements that could prove to be very valuable in the future. This hidden value is something every Successful Investor should be looking for on a natural gas stock’s balance sheet.

Do you think more environmental regulations will be implemented, making fracking or other methods for obtaining natural gas harder to make money from?

Do you think investments in natural gas are a losing proposition at this point? Or is there still a steady profit to be made?