How Dan Dicker Is Playing Natural Gas

NEW YORK (TheStreet) -- Gold, down 40 bucks. Oil has just given back two dollars and fifty cents. All of the commodity stocks are taking big rests from their recent spikes. We know the story: Profit taking is coming on the back of an enormous 2010 rally in commodities, most strongly in the month of December.

To you traders, I'll suggest that this is an opportunity to get in on a streaking commodity market. But is that opportunity in gold? No, not for me. Perhaps in oil? $89 doesn't represent enough of a pullback to get out the big guns, not yet. Instead, I see an even better opportunity; in natural gas.

There's another story that we have heard so often it hurts the ears: Natural gas is just too plentiful and too few incentives exist to spur the price here. Indeed, the recent run that 'natty' has seen to $4.60 an mMbtu will be explained by the analysts and the media as a quick response to unexpected lower temperatures here and in the Midwest, after which the fuel will quickly settle back to its $4 benchmark or lower.

Speculative Natural Gas Stock

The natural gas market is about to do what it does best: Make fools out of the conventional wisdom and destroy some more traders' accounts, as it has done with regularity since 2000. Natural gas is about to make a run for a target of $7, and the accompanying stocks are about to outperform in an energy sector where they have significantly lagged.

There are more than a few fundamental ideas that could spur natural gas to trade much higher in the New Year. Industrial growth, first forecast at 2.5%, but now expected at a more optimistic 4.5% to 5% for the year, will immediately impact the most elastic fuel out there to take up the shortfall -- natural gas.

Also, the fuel has two components: the dry natural gas that we always talk about and the "wet" components, like propane, hexane and pentane that most analysts forget about, but are crucial to the manufacture of plastics and other high-tech materials.

According to Glenn Williams, who writes for RealMoney.com and who I trust as the smartest guy on the industrial side of energy, shale gas plays contain much higher percentages of these wet gas components than more conventional drilling sources of nat gas. (You'll have to pay to see Glenn's stuff, but let me tell you -- it's worth it!). These shale plays are going to have profit potential well beyond simple methane supplies.

Finally, there are E+P companies ready to invest huge money to make the U.S. a world leading exporter of natural gas through liquefaction. When cooled to a frosty -260 degrees F, natural gas turns into a liquid, with 1/600th of the volume and ready for transport. Only one LNG facility so far exists in the U.S., at Kenai in Alaska, owned jointly by Conoco Phillips ( COP) and Marathon ( MRO).

Two more projects are in the works to bring LNG facilities on line by 2015: One by EOG Resources ( EOG) and Apache ( APA) in British Columbia and another by Cheniere Energy ( LNG) in Texas. Cheniere shares just rose close to 20% yesterday and are up more than 300% in the last six months.

Sure, the prospect for large-scale export of LNG is still more than a few months away, but Chinese energy importers are already lining up for an all-you-can-eat buffet as soon as the supply is ready. And, both Chesapeake ( CHK) and Encana ( ECA) are in discussions to be big suppliers of the new LNG facilities.

The point is, you've got to get in on these investments while things are still cheap - and they are very cheap NOW.

As analysts and forecasters fully expect natural gas prices to drop and level off back around $4, I think they've got this next move entirely wrong: This is the last dip this year that anyone will have a chance to buy.

But don't try to take advantage of this using futures, and please, whatever you do, don't buy the United States Natural Gas Fund ( UNG) -- perhaps the worst investment in the world. The way to take advantage of the coming tsunami in natural gas is through underlying stocks and thoroughly underperforming stocks, at least so far. In that group, Devon ( DVN) remains at the top of my list. I also own and believe in the leadership behind the aforementioned EOG Resources. If looking for a more speculative play, SandRidge ( SD), now more oily than ever, but still levered to natural gas for its share price, could make a great move on the back of a gas rally.

Find the commodity value in this latest profit-taking downdraft move -- in natural gas.

At the time of publication, Dicker was long DVN and EOG.

Related Articles

>> Natural Gas Ready to Explode

>> Look for Natural Gas Prices to Double

>> Icahn Right, but Chesapeake Wrong

At the time of publication, Dicker was long DVN and EOG.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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