Checking In: Is It This New ETF's Time to Shine?
It should be a good thing that the U.S. is known as the Saudi Arabia of natural gas, but the downside of that abundant supply courtesy of various shale plays has been low prices for the clean-burning commodity. So low have prices for natural gas fallen that until a few days ago, futures languished below $2 per per 1,000 cubic feet.
The steady decline in natural gas futures since they topped out in 2008 helped the U.S. Natural Gas Fund (NYSE: UNG) become nothing more than a favored target for short-sellers. As of April 19, UNG had lost 96% of its value since its 2007 debut.
But things are starting to look up (maybe) for natural gas. UNG has jumped almost 9% in the past five trading days leading up to May 1 and on Monday, the Energy department's Energy Information Administration said production of natural gas fell 0.8% in February from January. Yes, production was still up more than 9% compared to the year-earlier level, but any month-over-month decline is a welcome respite at this point for what few natural gas bulls are left.
Traders looking to capitalize on a possible natural gas resurgence should of course consider UNG, but those that favor equity-based funds might want to have a look at the new Market Vectors Unconventional Oil & Gas ETF (NYSE: FRAK).
FRAK, which debuted on Valentine's Day, hasn't delivered much love in terms of performance and by the end of March, the new ETF had the look of a new disappointment. Lest one be too quick to judge, rebounding natural gas prices have been a boon for FRAK, which has jumped 6% in the past week.
It's easy to see why. FRAK's constituents engage in the production of oil and natural gas from coal-bed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil and tight sands gas.
FRAK may now be in a position to thrive if natural gas prices rebound in earnest because the fund gives investors non-futures exposure to rising natural gas prices with some oil coverage. Occidental Petroleum (NYSE: OXY) and Hess (NYSE: HES), FRAK's second- and seventh-largest holdings, respectively, are oilier plays. EOG Resources (NYSE: EOG) and Devon Energy (NYSE: DVN), FRAK's third- and fourth-largest holdings, are major gas players, but the pair are also working to boost oil output.
Outside of FRAK's top-10 of 44 holdings is where the gas exposure really comes to light. Chesapeake Energy (NYSE: CHK), the second-largest U.S. gas producer, FRAK's 12th-largest constituent. Other major gas plays in FRAK's lineup include Southwestern Energy (NYSE: SWN), Range Resources (NYSE: RRC) and Cabot Oil & Gas (NYSE: COG). Not to mention, FRAK is home to a few credible takeover targets, Range included.
FRAK could also be a potential winner should the occupant of 1600 Pennsylvania Avenue change after the November election. On their own, neither takeover rumors nor political change should be the only reasons to buy FRAK, but since the ETF potentially has both factors in its favor, the bull case is bolstered. For now, look at FRAK for it really is: Not just a cute ticker, but a valid way to profit should natural gas prices continue higher.
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