Jon Makes The Bear Case For Natural Gas
By: Jon Costello
Longtime energy investors are undoubtedly familiar with the macro investment themes that arise, capture the industry spotlight, and then fade away after being discredited. Wind and solar as low-cost energy sources, natural gas as a short-term “bridge fuel,” and, most recently, peak oil demand over the next five years. The list goes on.
The fact that these themes were wrong didn’t prevent them from being widely accepted and lingering in investor thinking for years. In doing so, they caused massive capital misallocation that at times resulted in heavy losses.
These themes could have been disproven early on by those who kept their thinking clear and did the necessary work. An attitude of healthy skepticism also helps.
A popular theme today is the continuous rise in demand for natural gas and the supply growth required to meet it. This theme has appeared widely in the media and various sell-side research reports.
On the demand side, natural gas has become the go-to energy source for replacing coal used in power generation. It supports Asia’s economic growth and enhances Europe’s energy security. Natural gas is also emerging as the clear choice for powering data centers due to its availability, low carbon emissions, and low cost.
Meanwhile, on the supply side, North America will play a leading role in producing and transporting the natural gas necessary to meet global demand through LNG sales.
Like most of the themes that preceded it, this one has more than a kernel of truth. Natural gas demand is indeed set to explode. However, many observers see the demand forecast as a basis for predicting higher natural gas prices. They make the additional logical jump to conclude that gas-weighted E&Ps, midstream operators, and LNG producers will see higher profits, and that their stocks should be bought and held for several years.
But the verdict is still out regarding whether the boom will boost the profitability and stock prices of natural gas companies on a sustainable basis. Count me among the skeptics.
In this article, I discuss the points against the theme that the bullish natural gas demand outlook will drive gas-related stock prices sustainably higher. I offer a bearish take on the long-term outlook as food for thought and as a devil's advocate against the bull case, rather than as a prediction of the industry’s future.