The View From the Summit

The Investing Daily Summit

This week I will speak about energy investing at Investing Daily's annual Investing Summit in Alexandria, Virginia. Last year's presentation in Scottsdale, Arizona was my first since joining Investing Daily, and I laid out my personal philosophies for creating long-term wealth. They are:

Spend less than I earn and invest the rest

Minimize personal debt

Invest in businesses I understand

Understand the risk level

Avoid investments that are dependent on government subsidies and/or mandates

Identify long-term trends and invest accordingly

Have an exit strategy

I will cover a number of long-term trends in the energy business. One is that oil will continue to be hard to replace, and even though new supplies are coming online, voracious demand from developing countries and the higher costs of developing unconventional reserves will keep prices high. Another is that coal and nuclear power both face a lot of headwinds, and investors have to be extremely picky if they choose to invest in these sectors. On the other hand, solar power's prospects look bright, and solar will in the long run become perhaps our most important source of energy.

Natural Gas Powers Ahead

But the story of the year for me is the developing picture with natural gas. In my presentation last year, I had a slide that simply said "Natural gas is cheap." I went on to explain why I felt like natural gas was undervalued, and I made the case for investing in natural gas producers on the basis of several long-term bullish drivers.

What has happened since then?

Natural gas prices are up about 20 percent since I wrote that, and natural gas producers — undervalued for so long in my opinion — have begun to surge. Over the course of the year we added a number of natural gas producers to the various Energy Strategist portfolios, and by my count now! hold 10 of the country's top 20 as shown in the table below:

Top 20 natural gas producers in 2013. Source: Natural Gas Supply Association

For example, we added Chesapeake Energy (NYSE: CHK) — the country's second-largest natural gas producer — to our Aggressive Portfolio on May 13 and have gained 42 percent since. (Check the latest Energy Strategist for our current advice on Chesapeake and the other natural gas producers.)

Devon Finally Bounces

But Chesapeake isn't an exception to the rule. All of our natural gas producers in the portfolios — 100 percent — are sitting on gains. I personally bought the nation's fourth-largest natural gas producer — Devon Energy (NYSE: DVN) — last September because I felt the market was discounting both the potential for higher gas prices and Devon's moves toward even more lucrative liquids production. Devon's shares were pretty flat from the time I bought them until early February. I was in no hurry, because remember, I am targeting long-term trends and positioning accordingly.

But the very cold winter meant I didn't have to wait for investors to recognize the long-term bullish factors that I believe will support a natural gas price rise. The short-term factors lined up as well, as natural gas inventories depleted at a record pace this winter. Since Feb. 1, Devon shares have surged by more than 20 percent, and are regularly breaking through new 52-week highs:

Devon Energy’s share price, Feb. 3 through April 25

A similar picture has emerged for other natural gas stocks. They have all begun to move higher over the past few months. Since most natural gas producers also ha! ve substa! ntial liquids production, oil prices that are stubbornly clinging to $100 a barrel have helped.

Cabot's Production Surges

As I have been saying for months, most of these producers will report better year-over-year results versus last year. Last week Cabot Oil & Gas (NYSE: COG) — with most of its focus in Pennsylvania's gas-rich Marcellus Shale and the Eagle Ford crude oil shale of Texas — reported first-quarter results. Some highlights for the quarter were:

Natural gas and liquids production of 119.9 billion cubic feet equivalent (Bcfe), an increase of 34 percent over last year’s comparable quarter

Discretionary cash flow of $319.5 million, an increase of 36 percent over last year’s comparable quarter

Net income excluding selected items of $109.7 million, an increase of 102 percent over last year’s comparable quarter

Total unit costs of $2.66 per thousand cubic feet equivalent (Mcfe), a 19 percent improvement over last year’s comparable quarter

Despite what was shaping up to be a good quarter, shares had recently sold off after Cabot announced production would be flat during the first half of the year as a result of a transition to the more efficient pad drilling. Several brokerage houses even downgraded the company on the basis of this short-term outlook, but shares have surged since last week's earnings report, and are now up 17 percent in the last 10 trading days.

Conclusions

Based on my forecast for natural gas prices this year, I expect this to be a great year for the shares of most major natural gas producers. Some have already made strong advances, but many are still undervalued. For the long-term investor especially, it's certainly not too late to buy in.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)