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By Robert Rapier on Jun 10, 2009 with no responses

Time to Switch to Natural Gas?

A couple of articles, both at Seeking Alpha, got me to thinking about whether it might be time to trade in my Petrobras (PBR) stock for something in the natural gas sector. From the first of the two articles:

Natural Gas Should Get a Boost from China’s New Demand

China has been developing natural gas vehicles for many years, recently the number of vehicles running on nat gas has risen dramatically. For example, the government of Xi’an in western China, a medium size with 8M population, has decided to mandate all city buses and taxis using natural gas. The government website reported 5000 buses and 20000 taxis was using nat gas in 2008, and is expected to grow in coming years.

That wasn’t the most interesting bit for me. This was:

With natural gas price at historic low $3.74, investors should take advantage and invest in ETF such as (UNG), or producers such as Chesapeake Energy Group (CHK), Devon Energy Corp (DVN) and XTO Energy (XTO).

I haven’t been following natural gas prices closely, and would have expected them to be on the rise like oil prices. Speaking of which, the other article was about Petrobras, and it argued that the price is poised to rise further if oil prices continue to climb:

Petrobras Ready to Benefit from Next Oil Price Spike

During the credit crunch, there were concerns Petrobras would have trouble obtaining financing to exploit Tupi. The stock dropped from over $70 to a low of under $15 in November of 2008. However, the stock has recovered nicely as credit crunch worries have subsided and financing deals have been reached with China and others. Recently PBR traded above $43/share. The PE=11.7 and the dividend yield is a scant 0.70%. But this isn’t a dividend story. Unlike US majors XOM, CVX, and COP, Petrobras is a story about strongly increasing production in an age of peak oil. That will certainly lead to increasing profits and a stock that will outperform its peers.

To me, this explains why PBR is trading at $43 a share. But I bought PBR at $17.50 in November – having just barely missed the bottom – and it has risen sharply with oil prices. But I think the upside at this point is limited unless oil prices continue to climb. In fact, I would have sold it already if I wasn’t trying to wait long enough to benefit from the long term capital gains tax rate.

And while I think there is some upside left to PBR, natural gas stocks should go sharply higher if natural gas prices start to respond to higher oil prices. (Historically, this correlation has not been very good, but the two have correlated well in the past few years). We are also entering the low demand time of year for natural gas, and prices also reflect that. But if your outlook is a bit longer than past this summer, natural gas is looking like a real bargain to me. In fact, natural gas stocks remind me of PBR back in November…