Ways to Trade and Invest in Natural Gas

Ways to Trade and Invest in Natural Gas

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Trading Vehicles

  1. Futures Contracts
  2. Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs)
  3. Stocks

Futures Contracts

The primary means by which natural gas is traded is through futures contracts.

Natural gas futures contracts trade on a three primary exchanges. In the U.S., the New York Mercantile Exchange (NYMEX) is the primary exchange for trading natural gas futures contracts. The natural gas futures contracts trade in units of 10,000 million British thermal units (mmBTU). A benefit of this exchange is that contracts on this exchange can be traded just more than 23 hours per day (from 6:00 pm to 5:15 pm CST) from Sunday to Friday.

The second exchange on which natural gas futures contracts are traded is the Intercontinental Exchange (ICE). This exchange offers a more global approach to natural gas futures as it offers both United Kingdom natural gas contracts and Title Transfer Facility (TTF) Futures (Netherlands).

Finally, the Multi Commodity Exchange (MCX) is another global exchange for natural gas futures as it offers contracts from India. However, the size of these contracts is smaller than those traded on NYMEX as the contracts trade in units of 1,250 million British thermal units (mmBTU). This exchange is open every day with the exception of Sunday.

Many retail brokerages (e.g., E-Trade) do not offer the ability for retail investors to directly trade natural gas futures contracts. Instead, retail investors must use a commodity broker or an online brokerage that allows trading of commodity futures. Otherwise, retail investors may use the ETFs, ETNs, or natural gas company stocks below to invest and trade natural gas related vehicles.

Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs)

Exchange Traded Funds (ETFs) and Exchange Traded Notes(ETNs) are popular trading vehicles for retail investors of natural gas because they don’t require a forex trading account and can be bought and sold like a stock through any brokerage such as E-Trade or TD Ameritrade.

A variety of natural gas ETFs and ETNs are available for trading. Some of these vehicles strictly follow the futures price of natural gas as their underlying asset. Others follow the futures price of natural gas but are leveraged 2x or 3x. Finally, some simply track a portfolio of natural gas producing companies.

U.S. Natural Gas Fund LP (UNG)

The U.S. Natural Gas Fund (UNG) is an exchange traded fund that tracks the movements of natural gas prices in percentage terms.

The investment objective of UNG is for the daily changes in percentage terms of its shares’ per unit net asset value (“NAV”) to reflect the daily changes in percentage terms of the spot price of natural gas delivered at the Henry Hub, Louisiana as measured by the daily changes in the price of the Futures Contract on natural gas traded on the NYMEX that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire (the “Benchmark Futures Contract”), less UNG’s expenses.

The fund’s inception was April 2007, and it has an expense ratio of 0.60%.

Prospectus (UNG)

VelocityShares 3x Long Natural Gas ETN (UGAZ)

VelocityShares 3x Long Natural Gas ETN (UGAZ) is an exchange traded note that is linked to the S&P GSCI® Natural Gas Index ER.

The ETN seeks to provide long exposure to three times (3x) the daily performance of the S&P GSCI® Natural Gas Index ER (the “Index”) plus a daily accrual equal to the return that could be earned on a notional capital reinvestment at the three month U.S. Treasury rate as reported on Bloomberg under ticker USB3MTA, less the daily investor fee.

The note’s inception was February 2012, and it has an expense ratio of 1.65%.

Fact Sheet (UGAZ)

Prospectus (UGAZ)

VelocityShares 3x Inverse Natural Gas ETN (DGAZ)

VelocityShares 3x Inverse Natural Gas ETN (DGAZ) is an exchange traded note that is linked to the S&P GSCI® Natural Gas Index ER. Note that this vehicle is an inverse ETN. As a result, this leveraged 3x ETN provides natural gas traders a means to short natural gas futures.

The ETN seeks to provide inverse exposure to three times (3x) the daily performance of the S&P GSCI® Natural Gas Index ER (the “Index”) plus a daily accrual equal to the return that could be earned on a notional capital reinvestment at the three month U.S. Treasury rate as reported on Bloomberg under ticker USB3MTA, less the daily investor fee.

The note’s inception was February 2012, and it has an expense ratio of 1.65%.

Fact Sheet (DGAZ)

Prospectus (DGAZ)

ProShares 2x Ultra Bloomberg Natural Gas (BOIL)

ProShares Ultra Bloomberg Natural Gas ETF (BOIL) is an exchange traded fund that corresponds to two times the daily performance of the Bloomberg Natural Gas Subindex.

The fund’s inception was October 2011, and it has an expense ratio of .95%.

Fact Sheet (BOIL)

Prospectus (BOIL)

ProShares 2x Ultra Short Bloomberg Natural Gas (KOLD)

ProShares Ultra Bloomberg Natural Gas ETF (KOLD) is an exchange traded fund that corresponds to two times the inverse (-2x) of the daily performance of the Bloomberg Natural Gas Subindex.

The fund’s inception was October 2011, and it has an expense ratio of .95%.

Fact Sheet (KOLD)

Prospectus (KOLD)

Direxion 3x Daily Nat Gas Rltd Bull ETF (GASL)

Direxion Daily Nat Gas Rltd Bull 3X ETF (GASL) seeks daily investment results, net of expenses, of 300% of the performance of the ISE-REVERE Natural Gas Index. The fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the ISE-Revere Natural Gas Index and/or financial instruments that provide leveraged and unleveraged exposure to the index. The index is composed of equity securities of issuers involved in the exploration and production of natural gas. The fund is non-diversified.

The fund’s inception was July 2010, and it has an expense ratio of .95%.

Fact Sheet (GASL)

Direxion 3x Daily Nat Gas Rltd Bear ETF (GASX)

The Direxion Daily Natural Gas Related Bear 3x Shares (GASX) closed on September 29th, 2014.

Stocks

It is estimated that the United States possesses 2,203 trillion cubic feet of recoverable natural gas. The natural gas industry in the United States has been accelerated by the shale boom making the country the world’s top producer of natural gas. In fact, with the above estimate of recoverable natural gas, this potential supply is sufficient to last the United States over 92 years.

As a result, many energy companies have good reason to explore natural gas. However, the best companies are those which possess the lowest lifting costs of natural gas.

The following three companies are excellent vehicles for trading natural gas because their lifting costs are approximately $0.50 per million cubic feet. This figure represents approximately one-half of the lifting cost for the next closest company.

Range Resources (RRC)

Based in Fort Worth, TX, Range Resources (NYSE:RRC) is an independent oil and gas exploration company. The company’s value is noted in pioneering efforts in the gas-rich Marcellus Shale in Pennsylvania of which it possesses approximately 1 million net acres. In fact, the company has invested over $1B in Marcellus Shale to explore and extract the profitable natural gas.

In addition to its resources in the Marcellus Shale, Range Resources has natural gas exploration sites in Midcontinent (approximately 360,000 net acres) and the Southern Appalachia (approximately 475,000 net acres). In total, Range Resources estimates that its total resource potential exceeds 86 trillion cubic feet.

While these numbers are extraordinary in their own right, these estimates do not include Utica Shale, which has recently proved to be very promising. Aubrey Mclendon, the founder and former CEO of Chesapeake Energy (NYSE: CHK) referred to Utica Shale as “pound for pound, the best gas rock in the United States.”

Range Resources possesses approximately 400,000 acres in the Utica Shale area.

Range Resources

Cabot Oil & Gas (COG)

Based in Houston, TX, Cabot Oil & Gas (NYSE: COG) is one of the fastest growing producers of natural gas in the United States. The company operates primarily in the Marcellus Shale region (approximately 200,000 net acres) and Eagle Ford Shale region (approximately 86,000 net acres).

From 2009 to 2014, the production of natural gas by Cabot increased by a compound annual rate of 40%. Cabot assesses that it has a drilling inventory of 25 years with its most profitable region being the Marcellus shale.

Cabot Oil & Gas

EQT Corporation (EQT)

Based in Pittsburgh, PA, EQT Corporation (NYSE: EQT) estimates that its total natural gas resource potential is 44 trillion cubic feet. Like Cabot, EQT primarily operates in the Marcellus Shale region (approximately 580,000 acres)

EQT has the lowest lifting cost of any natural gas producer. As a result, the company can easily generate a strong return rate relative to its competitors, especially in a low commodity-priced environment. Alternatively, these rates of return are only increased by natural gas prices which exceed $4.50.

EQT Corporation

Other Stocks

Chesapeake Energy (NYSE: CHK)

CONSOL Energy (NYSE: CNX)

Anadarko Petroleum (NYSE: APC)

Devon Energy (NYSE: DVN)

EOG Resources (NYSE: EOG)

Noble Energy (NYSE: NBL)

Seventy Seven Energy (NYSE: SSE)

Matador Resources Company (NYSE: MTDR)

Stone Energy Corporation (NYSE: SGY)

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