NEW YORK (
) -- Warren Buffett has made some interesting bets on energy this year (
) with his
Burlington Northern Santa Fe
These investments have done well as the United States and other nations increase their energy demand. However, while the Oracle has a broad number of energy plays in his hand, he has not made a large bet on natural gas.
That changed with Exxon's recent purchase of
. This move has placed the Buffett right in the midst of the struggling natural gas market. Whether this move will earn Exxon and
profit will depend on the oil giant's ability make changes to fix natural gas.
This year, because of drastic oversupply, the natural gas market has taken a gut-wrenching nosedive. ETF investors hoping to play the physical commodity with the
U.S. Natural Gas Fund
know exactly what I'm talking about.
In the time I have been warning investors about the dangers of holding UNG, I have seen the fund fall to under $9 from $16 per share a result of supply issues and contango. Fortunately, investors have seen a bit of relief recently as a rally sent it over $10. However, at the rate which gas is being produced, supply issues are expected to down prices into the next decade.
With the future of natural gas looking dire, it is interesting that Exxon Mobil would express an interest in expanding further into the industry. Up to now, the firm has made only small efforts to break into the natural gas industry, but that changed this week when it made a multi-billion-dollar bet on the fuel source with its acquisition of XTO Energy.
The acquisition will not only make the oil giant a larger energy presence, but a leader in alternative natural gas production. The merger gives XOM access to an additional 14 trillion cubic feet of proven reserves, 80% of which are natural gas. Additionally, the acquisition of XTO boosts Exxon's unconventional natural gas acreage to 8 million acres -- the largest in the industry. With this large a position, it's possible that the firm will be able to bring some consolidation and standardization to the U.S. natural gas market.
In the past years, XTO has grown to become one of the largest independent natural gas producers and a leader in alternative natural gas production methods, including horizontal drilling and fracturing wells. While the development of these methods has allowed XTO to flourish, it has also attracted new producers and increased competition that has led to sky-rocketing supplies and plummeting prices.
This could change if large natural gas firms like
see Exxon's decision to buy up XTO as prime opportunity to bump up their own unconventional gas efforts.
If so, they may decide to buy up some smaller companies in the industry. This will, in turn, decrease the total competition in the sector.
Additionally, low natural gas prices may lure other oil majors including
into the arena, pushing more small firms out.
Ultimately, the Darwinian trimming would leave only a small number of strong natural gas producers running the lion's share of the unconventional gas market. Under this scenario, XOM, Buffett and other large natural gas and oil players would be in an ideal position to earn some strong profit.
ETF investors looking to benefit from the possibility of future natural gas industry consolidation would best benefit from owning the
First Trust ISE-Revere Natural Gas Fund
While this fund tracks a broad array of firms responsible for the production, transportation and storage of natural gas, it has recently
the performance of oil funds like the
U.S. Oil Fund
and other exploration funds like the
iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund
This has allowed the fund to remain more stable as UNG suffered a freefall. However, if Buffett and Exxon can initiate changes to save the natural gas market, this fund will likely break out and prove to be a big winner.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion did have hold any equities mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.