Why It’s Time To Load Up on Natural Gas
Natural gas is on its way to becoming the cheapest energy source out there… again.
This time, it’s not because natural gas prices are falling, but because coal prices are rising. As I showed you last week, the price of coal is getting a boost from anti-nuclear sentiment inspired by the disaster at Japan’s Fukushima nuclear power plant.
Short of a major, global economic catastrophe, coal prices are going to keep climbing… and that’s great news for natural gas. You see, some power plants can substitute natural gas for coal. And when coal gets expensive relative to gas, they switch fuels.
Now, take a look at the chart below. It’s a ratio chart of coal prices over natural gas prices, measured by price per British Thermal Unit (BTU). As the line rises, coal is getting more expensive relative to gas…
Natural gas is a much more desirable fuel than coal. It offers clean combustion. Coal is a bad actor. It produces sulfur and nitrogen compounds that pollute the air. Its ash is often hazardous waste.
When natural gas is cheap compared to coal, it’s seriously undervalued. It won’t stay that way, thanks to its utility. So if coal prices continue to rise, natural gas prices should follow.
That means it’s a great time to load up on natural gas stocks.
The thing is, with the market so uncertain right now, I’m not buying natural gas producers – the companies that explore for and drill natural gas deposits.
#-ad_banner-#I think the better opportunity here is in our old friends, the royalty trusts. In simple terms, a natural gas royalty trust is a collection of gas-producing properties. Royalty trusts enjoy a tax status that allows them to pass most of their income onto shareholders in the form of “distribution” payments.
The beauty of owning a natural gas trust is that they pay you to wait on strengthening gas prices. So if the economy stumbles here, and our shares don’t climb from these levels, we’re still making money.
If you want to take a position in natural gas companies, take a look at companies like Permian Basin Royalty Trust (PBT) and San Juan Basin Trust (SJT). Safe, existing natural gas production generates yields near 7%.
If natural gas prices catch up to coal, these companies could see a significant rise in share price. In the meantime, they pay regular dividends.