Rock-bottom natural gas price draws breed of brave investors

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They are in the decided minority, and they know it. Others call them insane, or worse. They are the buyers of a commodity nobody wants, the gamblers putting down money on a horse with long odds.

They are the natural gas bulls, a very small group of investors looking at a spectacularly bad market and seeing a chance to buy.

In Canada, natural gas prices have fallen below $2 (U.S.) per million BTUs, touching 14-year lows in recent weeks, as a warm winter diminishes demand for the fuel at the same time big new discoveries create a supply glut. Gas prices are now so low it's difficult to find a single area on the continent where it is profitable to drill for the commodity alone. Instead, companies are drilling for other liquids – oil, propane, ethane – and producing gas largely as a byproduct.

But a select few investors have now decided they "are crazy enough to invest in it," said Ken Woolner, chief executive officer of Velvet Energy Ltd., a private company that bought $209-million in gas assets earlier this year.

His openness to buying natural gas is not based on some sophisticated analysis of how current market trends could be upended. It is, instead, founded in history.

"I've been doing this now since the early '80s and I've seen cycles come and go," he said. "One thing that's predictable to me is the psychology of any particular commodity has a certain profile to it."

In other words, the night is always darkest before the dawn. Right now, Mr. Woolner said, natural gas has entered a "more bearish than just bearish, depressing, it-can't-get-any-worse phase. And I've seen this before. And historically, that's always been an opportunity."

He recalls buying oil assets in 1999, with oil prices at $10 (U.S.) a barrel and expectations they would fall to $5. Six months later, they had recovered to $20.

With natural gas, "can I point to anything right now that makes me wildly bullish? No," he said. But there are factors out there – plans to increase the use of natural gas in vehicles, to convert some coal-fired electrical plants to gas and to develop new export terminals for liquefied natural gas – that could cause a shift.

His view is clearly an outlier, at a time when some have begun asking what will happen to a place like Alberta when gas prices hit $1 – or zero. (There is historical precedent for gas prices falling into negative territory, although only briefly at times when companies are attempting to sort out, for example, pipeline congestion.)

But the market expects Alberta's natural gas storage to be filled within coming months, meaning congestion is likely.

"If we run out of storage this year, then something has to give," said Tim Simard, managing director at National Bank of Canada. Either prices have to go low enough to cause people and businesses to start using more gas, or producers will start turning off the taps.

Compared to historical averages, 6 billion cubic feet a day of additional natural gas is now being used to generate electricity once made with coal – or nearly 10 per cent of all U.S. gas output. But much of that demand is based on gas being cheap. If prices rise, power plants could switch back to coal.

"If you start seeing Nymex prices push much above $3 you'll start to lose that demand we've captured from coal," Mr. Simard said.

That could place a very low ceiling on a gas recovery.

Still, after gas production in the U.S. leapt 7.5 per cent last year, there are signs that low prices are having an impact. Major producers like Encana Corp. and Chesapeake Energy Corp. are leaving some gas in the ground and cutting spending plans. In the U.S., the number of rigs drilling for gas is tumbling fast – from 880 this time last year, to 663 last week to 652 this week.

The gas bulls believe there are ways to invest now without losing your shirt: buying production that declines slowly, so you don't have to drill much today. Buy land that has plenty of opportunity to drill in future, so you can grab it cheaply today and have plenty of upside if there is a recovery. And, of course, looking for land that has lots of those valuable liquid fuels – like butane, which in per-barrel terms is trading at $90, or six times natural gas.

Jim Nieuwenburg, a general partner with Calgary-based private equity group Kern Partners, said it's tough to determine "whether it's good to go into gas now or later." A recovery could take years – Canadian Natural Resources Ltd. has said it could take a decade.

But there is no denying that gas today is cheap, with gas-rich land trading at a sixth the cost of oil-rich land.

"For new entrants or for incumbents who are looking to expand their position, it probably is a good time, if you've got a long-term perspective," Mr. Nieuwenburg said. "I would say the current situation of gas pricing is not sustainable."