Smart Natural Gas Plays - TheStreet

With natural gas moving over $5 after sitting in the doldrums for most of the year, our focus is really heating up on this fuel of the future. There are a lot of reasons for this continued move higher in the price of natty and a lot of interesting opportunities to look at in the space. Let's have a look at both.

I've been a bull on natural gas for a long time: It's the clean, abundant, domestic fuel we need to move from coal and crude to the alternatives and sustainable fuels of the future. Everyone, except in Washington, seems to know this, but why has natural gas made such a big move recently?

Two things have been key, and both of them have related to the Gulf of Mexico disaster. First, most people don't realize how much natural gas is found in deepwater drilling in the Gulf. They see the live cam of the

BP

(BP) - Get Report

spill and see the tar balls washing up on the beach and figure that only crude oil comes out of that pipe on the ocean floor.

But whenever you drill for oil, you're likely to also find gas just above the reservoir . This is how it is at Macondo, although the runaway well doesn't show it: The natural gas spews out of the well and dissipates in the air after rising to the surface.

A significant percentage of domestic nat gas comes from deepwater drilling -- and 65% of the drilling in the Gulf of Mexico is in deepwater. A 15% decline in production in the Gulf -- a near certainty considering the moratorium and further regulations that the Interior department and the Obama administration are going to demand - will significantly affect supply, translating into a 600 mcf loss.

And the Gulf disaster is having an investment affect as well. With filthy crude spewing from the BP well, investors have been looking to embrace a future of natural gas, perhaps even more quickly than the White House.

While spot markets in natural gas have rallied strongly, the strip of natural gas prices (the average of prices throughout the one year curve) has stayed relatively steady. This implies to me more of a financial interest in investing in natural gas than a fundamental supply problem. That's been the key impetus to this rally, and how prices have moved so far, so fast.

Retail investors aren't savvy, but they can have a monster impact on prices rather quickly. With ETF's like the

United States Natural Gas

(UNG) - Get Report

totally tethered to front month futures, even a little more investment interest can drive prices quickly higher.

But maybe the "stupid" retail investors, for once, aren't wrong. We'll see how far the White House will go in embracing natural gas, but a few incentives from Washington could easily drive prices to my $6 dollar target by summer's end. Even a 10% shift from coal to natty will affect the demand on gas by 3 Bcf a day.

So how do you take advantage of this move? The long-term play is to invest with natural gas companies that are not as tightly levered to the price, so that fast moves of capital in and out of the commodity won't translate to fast moves of stock prices, too.

In that category, you have

Apache

(APA) - Get Report

,

Chesapeake

(CHK) - Get Report

,

EOG resources

(EOG) - Get Report

and my favorite

, Devon

(DVN) - Get Report

. I would have included smaller

Cimarex

(XEC) - Get Report

, but after recommending that one in March, I think it has overrun its price target at $80 and no longer looks like a value -- although it is a monster good company.

If you like the commodity play, stay away from the ETF's like the UNG and play in natural gas stocks that are heavily levered to the price of the futures. Two that immediately come to mind are

Southwestern Energy

(SWN) - Get Report

and

Ultra

(UPL)

.

I still like the commodity and see it going much higher, but would rather see investors play the stocks. And with natural gas prices shooting past $5 and staying there, there's a lot in the space to look at.

At the time of publication, Dicker was long Devon, Cimarex.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.