Bulls Cool on Natural Gas

These days, energy bulls seem to be placing some risky bets on the weather.

Granted, energy stocks may look cheaper than they once did. With energy prices falling from their record peaks, big companies such as Apache (APA) and Chesapeake (CHK) now fetch considerably less than they did during the disruptive hurricane season just two short months ago.

Even so, some experts say, energy stocks -- and natural gas plays in particular -- could take another hit in the months ahead.

"Longtime and long-term bulls on natural gas, as we are, need to look carefully at storage and production levels and the prices in the futures and spot markets," Harry Chernoff, a principal at Pathfinder Capital Advisors, recently cautioned in an article for the trade publication EnergyPulse. "These signs suggest the potential for lower prices in the very near term. ... Only cold weather -- and plenty of it -- can change this situation."

With the weather notoriously unpredictable, Chernoff has decided to play it safe. In recent weeks, he has cashed in some of his gains on stocks such as Abraxas (ABP) and GMX Resources (GMXR) -- which more than tripled after he first mentioned them in TheStreet.com -- even though he remains upbeat about the long-term prospects for the sector.

"If natural gas prices go up several dollars, the stocks will go up, too," he concedes. "But if gas prices go down, the stocks will go down a lot more. ... The risk/reward [scenario] is not symmetrical."

Abraxas peaked at $9.25 a share in November but has plunged in recent weeks, ending down 5 cents at $6.58 on Thursday. Meanwhile, GMX Resources hit an all-time high of $30 late last month before losing some ground and closing Thursday with a 99-cent gain at $28.60.

Warning Bells

Chernoff started worrying in early November.

He says he was "surprised" that natural gas inventories held up even after hurricanes slammed production levels in the crucial Gulf Coast area. However, he notes, the market itself showed less reaction. During the weeks leading up to the first cold snap of the year -- which finally hit in mid-November -- he says that gas futures for December still fetched $3 more than actual spot prices for the fuel. He attributes this "unusually wide difference" to nothing more than big gambles on a very cold -- and very early -- winter heating season.