Big Business Using More Natural Gas (UNG, T, UPS)

Thanks to natural gas prices coming down and more discoveries of American deposits utilities are debating whether to retrofit coal plants for gas. Big corporations such as AT&T (NYSE:T) and United Parcel Service (NYSE:UPS)  are beginning to convert large truck fleets from oil-based gasoline to natural gas.  Could this be a reason to start looking at going long the United States Natural Gas Fund, LP (NYSE:UNG)?

The United States Natural Gas Fund (UNG), the largest oil and gas exchange-traded product, recently issued new shares for the first time since July. The lengthy interval between new share issuances certainly wasn’t due to a lack of demand. In recent months, investors have been clamoring to get access to natural gas, bidding up shares of UNG to a huge premium and causing the fund to look and act more like a closed end fund than an ETF.   The UNG has bounced all over the place this year, $17 in May, $9 in September, and YTD the ETF is down 50%. 

Elevated Section of the Alaska PipelineFacing an uncertain regulatory environment and unrelenting demand from investors, UNG has for months found itself between a rock and a hard place. If UNG had issued new shares to satisfy investor demand, the fund would have put itself in jeopardy of violating regulations expected to be issued by the CFTC regarding position limits on futures contracts. In such a scenario, UNG could potentially be forced to sell off a huge chunk of its holdings in the near future, to the detriment of shareholders. But by refusing to issue new shares, UNG subjected shareholders to a wild ride, as the premium on the fund soared to near 20% above net asset value (NAV) this summer.  A reason to go long on the UNG?  How about Big Business.

Betting Big on a Boom in Natural Gas (BusinessWeek.com)
With prices low and the promise of vast new supplies, businesses are making the switch from oil-based fuels and coal.

Earlier this year the time came for Lloyd M. Yates, CEO of Progress Energy (PGN), to decide how the big Raleigh (N.C.) utility would meet the state's stringent smokestack laws. First he considered the easy solution: installing pollution scrubbers on the utility's old coal-fired plant in Sutton, N.C., at a cost of $330 million. Then his attention turned to natural gas, the price of which had plunged by two-thirds in the previous year. Sure, the recession accounted for some of the slide. But reports were also circulating of massive discoveries of natural gas in the U.S. Moreover, because the fuel emits half the carbon of coal, it seemed safe from the climate legislation being considered in Washington, which could impose steep penalties on emissions.

After weighing their options, Yates and his board decided against the scrubbers and opted to upgrade another coal plant to natural gas—a $900 million project. In Yates' calculations, that would satisfy the smokestack law and more than pay for itself over time. "It was like deciding whether to put a catalytic converter on a '52 Chevy," Yates says. "It was: 'When do you buy the new car?'"

The U.S. natural gas industry hopes that as Lloyd Yates goes, so goes the country. In summer 2008 the U.S. and much of the rest of the world were consumed by talk of peak oil and natural gas and fears that high fuel prices would persist forever. Today analysts still worry about the oil supply but far less about natural gas. U.S. gas producers, capitalizing on a technological breakthrough, have in recent years unlocked an enormous volume of natural gas in the shale rock under Colorado, Oklahoma, Pennsylvania, Texas, and other states. According to a July report by the Colorado School of Mines, the U.S. now holds 1,800 trillion cubic feet of natural gas, one third of it in shale, the equivalent of some 320 billion barrels of oil. That's more than Saudi Arabia's 264 billion barrels.

Of course, natural gas isn't interchangeable with oil and won't solve America's energy woes by itself. While natural gas can be used to heat homes and power vehicles, it's mostly used, like coal, to generate electricity. 

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