Portfolio Manager Perspectives

Jeff Benjamin

Cheap natural gas has these stocks burning it up

Falling prices a boon to companies that convert engines to run off the cheaper fuel, says portfolio manager

Mar 23, 2012 @ 10:56 am

By Jeff Benjamin

The glut of natural gas in the United States has created a unique investment opportunity that could be in place for the next few years, according to Ron Muhlenkamp, manager of the $500 million Muhlenkamp Fund Ticker:(MUHLX).

“We expect the spread between the price of crude oil and the price of natural gas to be sizable for the next three to five years, and I'm going to be playing that spread,” he said.

While the price of the two commodities historically have moved in tandem, the separation that began to take shape in early 2009 continues to widen.

Mr. Muhlenkamp is tapping into the spread by focusing on innovators in the natural gas industry.

Westport Innovations Inc. Ticker:(WPRT), for example, is a company involved in converting petroleum-fueled engines to run on natural gas.

The stock, which gained 79.5% last year, already is up nearly 40% this year.

Another recent highflier is Clean Energy Fuels Corp. Ticker:(CLNE), which also provides natural gas conversions for petroleum engines, but also is involved in building a nationwide network of natural gas fueling stations. Clean Energy's stock, which was down nearly 10% last year, has gained 92% so far this year.

In terms of exploration, Mr. Muhlenkamp is avoiding the traditional brand name drillers and instead is focusing on what he described as the “mom and pops.”

“The majors are behind the eight ball on this because they're competing with the smaller companies and trying to play catch-up,” he said.

Two names he likes — even though falling natural gas prices can pinch drillers — are Range Resources Corp. Ticker:(RRC), and Rex Energy Corp. Ticker:(REXX).

Range shares gained 38% last year, but are up less than 1% from the start of this year. Rex shares gained 8% last year, and have fallen by 24% from the start of this year.

Mr. Muhlenkamp is focused on the spread between crude oil and natural gas even though he doesn't see a strong case for oil going much higher.

“Fundamentally, looking at supply and demand in the oil market, it's hard to argue that it should be more expensive than it is right now,” he said. “And I just don't see a reason why oil should go up from here.”

But while there may be no fundamental reason for oil to climb much beyond the current level of around $107 a barrel, natural gas prices will stay low until there is a major increase in demand, he said.

Oil and natural gas peaked together in late 2008, then fell in stride until early 2009, when the separation began. Since that point, the price of oil has increased by 167%, while the price of natural gas has fallen by almost 50%.

Calculated in terms of the largest exchange-trade funds representing each commodity, the United States Oil Fund Ticker:(USO), which reflects the performance of the spot price of West Texas intermediate light, sweet crude oil, is up 67% from the start of the year.

The United States Natural Gas Fund Ticker:(UNG), which represents the price performance of natural gas, hasn't performed quite as well. It's down nearly 29% from the start of the year.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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