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3 Commodity Plays That Could See Double-Digit Returns in the Next 6 Months
On Friday, May 17, the Department of Energy (DOE) announced a most-interesting decision that could mean big upside for natural gas prices and for the companies that export liquefied natural gas, or LNG. The DOE put out a press release that gave permission to one Texas-based company to export LNG to countries that do not have a Free Trade Agreement with the United States.
Interestingly, the $10 billion LNG facility run by Freeport LNG Expansion, L.P. and FLNG Liquefaction, LLC actually will be converted from an existing LNG import facility to an export facility. This transition from LNG importer to exporter represents a long-term seismic, and in my view quite investable, shift in the LNG industry.
According to my friend and commodities expert, Tom Essaye of The 7:00's Report, this new LNG facility is set to export 1.4 billion cubic feet of LNG starting in 2017. Tom, who follows the natural gas space closely, informed me that this is now the fourth facility to get regulatory approval to export LNG.
I suspect that this DOE move is another rung in the bullish ladder for LNG, and it's a trend that could increase the amount of LNG that will be exported in the years to come.
To put this situation into perspective, I turn to Essaye, who explained, "Currently, there are 19 projects awaiting approval to export LNG. If all of them get approval, that would result in a 60% per annum increase through 2020 in the volumes of LNG being shipped around the world."
Permission to export more LNG will likely translate into increased global demand for this cleanest of fossil fuels, and that increased demand will be bullish for natural gas prices and for companies in the LNG transport space.
Now, when it comes to the price of natural gas, we can see by the chart here of United States Natural Gas Fund (NYSE: UNG), an exchange-traded fund pegged to the spot price of the commodity, that prices are up recently.
Shares have just climbed back above their short-term, 50-day moving average (blue line), which is a bullish technical signal. In fact, after experiencing a sharp decline from November through early January, natural gas prices have enjoyed a nice move higher.
This technically bullish short-term trend comes with the backdrop of strong fundamentals in the space, including big improvements in extraction methods such as fracking. Moreover, I suspect that the need for clean sources of energy by an environmentally sensitive global consumer means that natural gas could be entering a new bull market.
Recommended Trade Setup:
-- Buy UNG at the market price
-- Set stop-loss at $20.50, just above the current 200-day moving average
-- Set initial price target at $25.95 for a potential 15% gain in six months
Another way to take advantage of the conditions in the LNG space is to buy companies that are in the business of LNG transport. Here there are two leading publicly traded firms in the space, GasLog Ltd. (NYSE: GLOG) and Golar LNG Ltd. (NASDAQ: GLNG).
Both of these stocks saw a spike higher as a result of Friday's DOE news, and though GLOG was off in Tuesday trade, the stock has enjoyed a nice run higher during the past month, up nearly 14%.
As for GLNG, the stock continued its rally Tuesday and is now up about 13% during the past 30 days, a move that underscores the bullish mood in the LNG tanker space.
I suspect both of these stocks will be good long-term trades, especially if you are willing to tolerate a little volatility along the way. As Essaye puts it, "They [GLOG and GLNG] have more spot market exposure over the next few years, which means they will be able to raise prices as demand for LNG transport heats up."
If you have some money that you want to commit to a longer-term trade (say six to 12 months or even longer), then I think LNG tanker stocks such as these could give you some very strong upside.
Recommended Trade Setups:
-- Buy GLOG at the market price
-- Set stop-loss at $12.17, approximately 10% below the current price
-- Set initial price target at $15.55 for a potential 14% gain in six months
-- Buy GLNG at the market price
-- Set stop-loss at $33.56, approximately 10% below the current price
-- Set initial price target at $42.88 for a potential 15% gain in six months