Three Hot Commodity Stocks For 2016

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3 Energy Markets In Distress Ask anyone who watches the energy markets religiously, and they ll tell you the same thing... The price of oil and natural gas have along way to go to get back to bull market levels. In fact, the price of West Texas Intermediate (WTI) crude oil dropped to multi-years lows at under $30 a barrel in early That s a remarkable downturn for the commodity, which was around $100 per barrel or above for most of the early part of the decade. While crude oil has gained some back in recent months, it has a long way to go to reach its peak levels from a few years back. Natural gas isn t faring much better The commodity is off its lows from early 2016, but at under $3 MMBtu, it s well below the $6-$7 MMBtu we were used to in the early part of the decade. Clearly, energy commodities have seen their better days. But here s the deal A few very important fundamental factors are converging that will send natural gas (and eventually oil) back to higher ground and soon. And with natural gas trading near multi-year lows, there s a substantial profit opportunity in the commodity, as well as the companies producing it. Let me explain US Production Ready To Slow As I mentioned a second ago, natural gas is trading near multi-year lows thanks to abundant supplies. Quite simply, energy producers have had no problem providing US consumers with as much of the commodity they want. But that may be about to change In case you re unaware, a large share of US natural gas supply (about 23%- or 16 billion cubic feet per day) comes from what s known as associated production. You see, when an oil well is drilled, most of the time it can t help but produce natural gas as well.

4 Fact is, natural gas is a key byproduct of oil production always has been. And thanks to the US crude drilling boom of the past few years, there s an absolute plethora of producing oil wells. Of course, that s why the price of crude crashed to multi-year lows this year- there s just too darn much of it floating around. And since oil producers are reluctant to shut off production (they need the cash flow to pay the bills) associated natural gas keeps getting pumped into the US pipeline system. This associated gas is partly why US natural gas production has remained steady in However, here s where it gets interesting The number of rigs drilling for fossil fuel energy has dropped precipitously the past year. According to the Baker Hughes rig count, which is a weekly update on the number of drilling rigs searching for oil and natural gas in the US, around 54% of drill rigs have been shuttered in the past year. In other words, US oil and natural gas exploration has been cut in half! So not only is US oil production destined to decline soon, but the associated gas coming from those oil wells will also. But that s just the start of it Natural gas focused drill rigs are getting idled at an alarming pace as well. With the commodity trading below $3 mmbtu for an extended period, many cash strapped producers are slowing their exploration efforts meaningfully in an effort to cut costs. In fact, producers in the Marcellus and Utica Shale of the Northeast US have reported overall rig count reductions of 55% and 66%, respectively. What s it all mean? Low prices are in the process of curing low prices. It s simple economics. When it becomes unprofitable to produce a commodity (natural gas in this case), companies must quit doing it. Sometimes it s a long, arduous process, but it always works this way. Here s what s important Eventually the supply/demand balance must shift back in favor of the bulls. As more and more producers slow their production (or go out of business), supply of the commodity decreases.

5 Here s the deal If demand for a commodity stays steady, or heaven forbid it INCREASES - well folks, the stage is set. Prices must rise in order to compel producers to start producing again. Speaking of an increase in natural gas demand, check this out US Natural Gas Exports Starting In The US energy markets recently hit a major milestone For the first time in history, a contiguous US based facility is exporting natural gas to overseas markets. That s right, Cheniere Energy $LNG was the first company to send vast quantities of super-cooled natural gas across the ocean in specially designed tanker ships. The first ship left port in the fourth quarter of It s been a long road to this point, but there are three terminals approved by the US Department of Energy (DOE) to export liquefied natural gas (LNG). What s more, there are nearly two-dozen export applications awaiting approval by the DOE. What s the big deal about that? Once these exports start, natural gas demand will increase. In fact, the US Energy Information Administration (EIA) projects 76.2 billion cubic feet per day (bcf/d) of natural gas will be consumed in That s up significantly from the estimated 73.5 bcf/d consumed in So let me recap the situation Not only are natural gas supplies going to start dwindling due to associated gas depletion and drilling reductions, but the US has a new source of natural gas demand hitting the market soon. What s it all mean? The price of natural gas is poised for a rally!

6 What s the best way to capitalize off this looming bullish trend? One option is to simply buy the US Natural Gas Fund (UNG) and wait for the fireworks to begin. As you may know, UNG is commodity ETF that tracks the price of natural gas. if natural gas trades higher, so does UNG. While buying UNG is certainly a good choice, there are other ways to rake in enormous gains from this looming bullish trend. I ve put together a list of three companies I feel are poised to make investors substantial gains in late 2016 and beyond. Let s get to it! Best Natural Gas Stocks For Late 2016 And Beyond! Without question, the oil and natural gas price downturn of the last couple years has plenty of energy producers struggling to survive. It s unfortunate, but the current industry weakness will very likely take a lot of industry players into bankruptcy (more on that in a minute). That s why it s essential to focus our investment efforts on companies with a solid balance sheet. That means companies with low liquidity and/or high debt loads are off the table. Instead, it s best to look to the industry leaders that not only produce natural gas cheaply, but have strong balance sheets posing zero risk of bankruptcy. Here are a few that should be at the top of your list Company #1 Range Resources $RRC Here s a company with a large acreage position in the Marcellus and Utica shale of Pennsylvania. As you may know, these two fields are turning out to be the most prolific natural gas resources in the US. Thanks to consistently improving drilling efficiency, $RRC has become one of the lowest cost producers in the area. In fact, the company can produce natural gas at a region leading breakeven cost of $2.62 per mcf. Here s the best part

7 Not only does this company s shares have substantial upside thanks to factors mentioned earlier in today s report, their debt is considered investment grade by Moody s. Such recognition is reserved for companies with extremely strong balance sheets and credit metrics! Action Recommendation: Buy Range Resources $RRC Company #2 Southwestern Energy $SWN SWN energy is one of the largest natural gas producers in the US. The company holds nearly 10.7 Tcfe of Reserves across multiple shale basins. And much like $RRC above, $SWN is a low cost leader in the natural gas exploration and production industry. As a matter of fact, the company has finding and development costs of $1.29 per Mcfe across all their US operations. Why s that important? When natural gas prices start rising the low cost leaders will be the first to see margins expand. And the best part is Thanks to the downturn in the energy markets, you re getting a chance to buy shares at a great value! Action Recommendation: Buy Southwestern Energy (SWN) Company #3 Cabot Oil and Gas $COG Here s another one of the US s biggest natural gas producers With 2014 year-end proved reserves of 7.4 Tcfe and 1.5 Bcfe/d of production in Q4 2014, $COG is the 5 th largest natural gas producer in the US according to the Natural Gas Supply Association (NGSA).

8 The company has 200,000 net acres in the Marcellus shale, which has them enjoying extremely low finding and development costs of around $0.43 per million cubic feet (Mcf). That s cheap! Of course, $COG also has the strong balance sheet energy investors want to see in times like this. With ample liquidity, $COG is an energy name you can bank on surviving the current downturn! Action Recommendation : Buy Cabot Oil and Gas $COG Now that we ve covered the best bullish bets in the natural gas space, let s take a look at a few stocks you should avoid. A Few Commodity Stocks To Avoid No doubt about it, times are tough in the energy space right now. Plunging commodity prices and heavy debt loads have many producers barely hanging on to solvency. Let me put it simply. If you want to invest in the energy space right now you must avoid heavily leveraged companies. These are the producers that made big capital bets on exploring new areas in 2013 and 2014, which they financed with debt. But now that the price of the commodity they searched so desperately for has collapsed, they re left holding the bag. Here are a few energy explorers I would avoid like the plague Rex Energy $REXX Samson Oil & Gas $SSN Penn West Petroleum $PWE TransAtlantic Petroleum $TAT Halcon Resources $HK

9 A Final Word Given the looming slowdown in US natural gas production and the start of LNG exports to overseas markets in late 2015, it s very likely we re on the verge of a major bullish shift in the natural gas supply/demand balance. And with the price of this commodity (and many of the companies producing it) trading at multi-year lows there s an amazing profit opportunity presenting itself! Until next time, Justin Bennett, Editor Commodity Trading Research.com

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