Tuesday, March 2nd, 2010
Top 3 Stocks (and an ETF) for a Natural Gas Rebound
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Hugoton Royalty Trust (NYSE:HGT), Enterprise Products Partners L.P. (NYSE:EPD), and First Trust ISE Revere Natural Gas (NYSE:FCG) are our top three plays for a natural gas rebound.
Natural gas may be trading at a historically low price of around $5 per million BTUs – down around 15% so far this year – but companies are increasing their spending and drilling more wells anyway. The move suggests a renewed enthusiasm surrounding natural gas’ future in the United States and abroad, as well as a more bullish long-term outlook.
Hugoton Offers Oversized Dividend
Hugoton Royalty Trust (HGT, Free Analysis), an express trust created with XTO Energy Inc., is one natural gas play that is trading at just 24.5x its trailing 12-month earnings with a yield of over 9%. Despite the oversized dividend, the underlying stock has also been extremely robust moving from a 52-week low of $7.29 to its current $17.94 per share.
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Play the Supply Angle with Enterprise Products
Enterprise Products Partners L.P. (EPD, Free Analysis), a midstream energy company providing a range of services to producers and consumers of natural gas, is another natural gas play trading at just 17.74x that pays a 6.78% yield. The stock, which provides an indirect play on natural gas price increases, has also already doubled over the past 52 weeks.
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A Pure Price Play with a Natty Gas ETF
First Trust ISE Revere Natural Gas (FCG, Free Analysis), an exchange-traded fund that seeks investment results that correspond to the price and yield of the ISE-Revere Natural Gas Index, represents a pure-play on the price of natural gas that doesn’t involve company-specific risk. Notably, even this ETF has risen from $8.29 to over $19 over the past 52 weeks.
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A Word of Caution…
Investors should always take caution when investing in trusts and limited partnerships as they require different treatment with regards to taxes. Often times, these investment vehicles avoid paying income tax because of their pass-through income tendencies, which means that the distributions made to investors can sometimes be taxed as ordinary income at a higher rate.
There is also no indication yet that demand for natural gas has begun to rebound. While many experts agree that prices cannot remain this low indefinitely, the timing behind a rebound could be extended with additional production capacity coming online. In the end, only time will tell if this production was really needed to meet a sharp rise in demand.
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-- Written by Rick Telfur
