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Weighing the risk



Published: Wed, September 5, 2012 @ 12:00 a.m.

Is natural gas a safe investment?

By Jamison Cocklin

jcocklin@shalesheet.com

YOUNGSTOWN

The shale boom in Northeast Ohio and other parts of the country continues to look promising, but at the same time, wayward trends in both the overall economy and global financial markets have led some to wonder if natural gas is a safe investment.

For the curious, and for those holding lump sums from oil and gas leases, just how strong certain market sectors are and where to turn with their money has become all the more confounding.

“There’s a lot of question marks still in terms of longevity. Like any stock, some of these companies come with a great deal of risk,” said Daniel J. Rossi, president of FEIC Financial, a wealth- management firm in Youngstown. “The exploratory phases of drilling are so expensive, and a handful of companies are financially strained because most of their investments are in the ground. Many companies have never gone through this kind of tide in their history — they’re stretched.”

In the spring, natural gas was trading at record lows on commodity markets. Today, many institutional investors have grown weary at the capital tied up in leading companies who are investing heavily in drilling and exploratory efforts.

The summer’s heat wave has driven prices up 67 percent since April, but natural gas is still about 35 percent cheaper than it was last year.

Financial advisers and wealth-management firms throughout the Mahoning Valley are exercising caution but remain optimistic for those looking to grow lease bonuses and royalties and others without vast tracks of land hoping to get in on the profits promised by companies such as Chesapeake Energy and Shell as they continue to expand their drilling efforts.

“Whether or not these companies are going to do well over a period of time, that’s probably anybody’s guess,” said Charles R. Stevens, a financial adviser at American Financial Services in Boardman. “My guess is they probably are going to do well. They’re managed properly, and they have a phenomenal opportunity right now to develop a product that will become a revenue generator for many years.”

The problem with investing in the common stock of larger energy companies, advisers and analysts say, is its volatility.

In all, the industry is not expected to hit full stride on financial markets for years. Most analysts point to 2016 as the turning point for natural-gas prices and stocks to rise.

“Short-term supplies are too high, demand is not enough to keep up with them, and this is why you’re seeing the commodity so low,” said Mary Bacella, director of North American Natural Gas at IHS CERA, which conducts international market analysis. “However, we expect that a rebalancing between supply and demand will take place in the next couple years.”

Indeed, new export terminals are scheduled to open around 2015, which will enable companies to better transport the product. Increased demand for natural gas as a power generator, and as a fuel for motor vehicles, likely will come together in the near future as well.

Advisers and analysts recommend looking into companies that currently use or plan to switch to natural gas and see how today’s low prices increase their efficiency and profits.

“It’s still so early in this boom that only now are we beginning to realize these economies of scale,” Rossi said. “Other industries are beginning to take advantage of the low-cost benefits of [natural gas], and investors should be turning themselves in that direction as well.”

Experts also say investments should be spread out and diversified. In addition to investing in the commodity and larger companies, they say small-cap energy companies also could be worth a look. Small-cap companies are those with lower market value, usually between $300 million and $2 billion. Though they can carry more risk, some small-cap energy companies could be on the verge of a technology breakthrough or discovering a new energy source.

“When dealing with a small-cap company, it’s a risk-and-reward theory; the upside potential is equal to the downside risk,” Stevens said. “It’s more likely that there will be a financial problem if there’s an issue because these companies don’t have the assets and resources to dig themselves out.

“There’s also greater gain because you get in on a stock that’s only a couple dollars per share, but it could easily go to a couple hundred,” he added. “It would be like buying Apple when it was still run out of someone’s garage.”

Both Stevens and his colleague, Richard Horvath, advise clients to first think about their willingness to accept risk.

The open market, they say, is not for everyone. In this case, fixed securities, such as bonds, CDs and Treasury notes might be a better investment option.

“I would rather have safety than big returns,” Stevens said. “We tell people you shouldn’t have all your eggs in one basket.”


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