If natural gas investments interest you, it’s worth looking beyond natural gas penny stocks to more stable companies with established production and cash flow

The price of natural gas, like the price of oil, is volatile—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, and their effects on natural gas stock prices, because these predictions are simply not reliable.

Far better to look for high-quality stocks that will report positive cash flow regardless of the direction of gas prices.

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Background information on natural gas supply and demand

Natural gas demand remains high. 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.

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). This has unfolded much quicker in the U.S. than in Canada.

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., have come around to the view that if gas producers can sell in foreign markets, they will create jobs, and so raise tax revenue.

What to know about Investing in natural gas companies:

• Weather affects prices. In the summer, natural gas prices could jump if it’s unusually hot. This leads to greater demand for natural gas-generated electricity for air conditioning. Hurricanes can also disrupt production. Hurricane season can last until the end of November in some parts of North America.
• The demand and cost of natural gas is rising. Around 60% of U.S. homes are heated with natural gas, and the clean-burning energy source is also used to generate electricity, another popular heating method. Most new electricity capacity brought on line right now is generated by natural gas, rather than oil, coal, water or nuclear. As well, when the price of crude oil increases, or remains high, some industries switch to natural gas. This leads to more demand, which could cause the price of natural gas to rise.
• Manufacturers can utilize different resources. Many manufacturers and utilities are able to switch back and forth between using natural gas, oil and electricity. If oil gets cheaper, this would lower demand, and prices, for natural gas.
• Pipelines are an important part of natural gas transmission. Natural gas is produced around the world, but the simplest way to transport gas is through a pipeline. Canada, which supplies around a sixth of U.S. consumption, is the main source of imported gas for the U.S.

7 characteristics we look for in natural gas penny stocks, although it’s rare to find high quality ones

1. We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
2. We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.
3. We want to see experienced management with proven ability to develop and finance a new business.
4. We look for well-financed penny stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
5. We like to see a strong balance sheet with low debt. Even better, we like to see a major partner who can finance to production.
6. We insist on political stability. For example, gas exploration is risky enough without the threat of expropriation or onerous taxes.
7. We compare the market cap of the stock with the estimated value of the company’s reserves, its future product sales and so on. Some pennies need to find a well, or successfully connect with a pipeline, to justify their current share price and avoid collapse.

Natural gas penny stocks may not be the best option, but you can still potentially profit from natural gas investments

You can profit over the long term by investing in well-established or well-managed companies that are active in businesses that involve volatile commodities like oil and natural gas. You will profit all the more if you buy these companies when they are cheap in relation to cash flow and the value of their reserves. Natural gas stocks may have a place in your portfolio.

Meanwhile, to get the maximum returns overall from your portfolio, follow TSI Network and use our three-part Successful Investor strategy:

1. Invest mainly in well-established, mostly dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

Fracking has become a controversial source of natural gas extraction. Does this reality impact the way you approach natural gas investing? Why or why not.