Just yesterday my colleague, Gordon Lewis, told you natural gas stocks were a great buy right now despite what all the experts are saying. The supposed experts have been predicting natural gas at a buck something lately. Yeah right
However, after yesterdays big natural gas news, I couldnt agree with Gordon more.
The US Energy Department has cut its estimate for natural gas reserves in the Marcellus shale formation. The previous estimate of 410 trillion cubic feet estimate was cut to just 141 trillion. Thats a reduction of over 65%!
Apparently, all of the drilling in the Marcellus has given the Energy Department more insight into the realistic potential of the shale formation. The reserve was once considered a 17 year energy supply of the US natural gas demand based on 2010 US natural gas consumption. Well, that estimate has been shaved down to just six years.
Whats more, the recent change in reserve estimates is just one reason Im bullish on natural gas stocks
Chesapeake Energy (CHK) announced Monday they plan on reducing their total dry gas drilling activity by 50%. In 2012, they plan on shrinking their operated dry gas drilling rig count to 24. That represents a shutdown of 50 dry gas rigs from their 2011 average count.
If youre wondering why theyre shutting down some of their operations, the answer is pretty clear
At current prices, natural gas is below production cost. So producers are losing money by drilling including CHK. And they have a responsibility to shareholders to turn a profit.
In the wake of the collapse in natural gas prices, it seems obvious wed see production shutdowns. And you can bet CHK is just the first of many.
Reduced supply estimates, combined with production shutdowns create an amazing buying opportunity in natural gas stocks. Its like lighting throwing gasoline on an open fire these stocks are certain to rise with the price of natural gas!
And for savvy investors looking to cash in on the current rebound in natural gas, Ive found a great penny stock to get you started.
Take a look at shares of Gastar Exploration (GST). Theyre a gas exploration company thats working in the Marcellus Shale and Appalachian regions. These are major gas producing centers. And GST currently has productive wells in these regions.
Amazingly, Gastar has little long term debt and are even expected to turn a profit this year.
Whats more, Gastar shares are a screaming value with a price to book ratio of just 0.89. That means, if the company was sold off into pieces, shares of GST would be worth $3.21! So with the stock trading around $2.86, you can bet youre getting these shares on the cheap.
If youre looking for a way to play the rebound in natural gas using penny stocks, take a closer look at Gastar Exploration for your portfolio.
Until next time,