Rick Rule is buying natural gas...
Longtime DailyWealth readers are familiar with our friend Rick Rule, founder of Global Resource Investments. Rick is one of smartest, most successful resource investors in the world. In one of the greatest "runs" in investment history, from 1998 to 2006, Rick turned $15 million into roughly $460 million (before fees) for his customers.
In the resource business, you have to be willing to buy cheap, out-of-favor assets to generate those kinds of returns. You can't buy the hot asset that everyone wants.
After a two-year, 60% run in the benchmark commodity index (the CRB), cheap, hated assets are difficult to find. And right now, one of the few out-of-favor assets is natural gas... which has collapsed in price since 2007.
That's why I recently called up Rick and asked him what he thought about "natty" these days.
As I said, he's buying here... There are three big reasons why he expects much higher prices over the next five years...
First, the demand picture looks good.
Natural gas competes with thermal coal as fuel for electric power generation. From 1999 to 2009, natural gas was rarely cheaper than coal. But thermal coal prices soared over the last year. And in late 2010, natural gas prices fell below coal prices... and remain there today.
Power producers are going to start switching over to the cheaper fuel. For example, BP has already given $15 million and Ford $5 million to fund Princeton University's Carbon Mitigation Initiative project, which proposes to replace 1,400 gigawatts of coal plants with natural gas by 2015. In the grand scheme, that's not huge, but it's indicative of the trend.
Second, supply is going to drop.
Natural gas prices are so low – under $4 per thousand cubic feet (mcf) – it costs more to produce gas now than you can get for selling it. Most natural gas producers need $4.50-plus gas prices to break even. And most of the big, harder-to-drill shale plays need $5-plus. Natural gas producers can't keep operating like this for long. We're already seeing production shut down.
Take ConocoPhillips, the third-largest natural gas producer in Canada, for example. Conoco just cancelled new natural gas wells. It will spend the money on oil sands projects instead. In addition, it laid off 80 employees in the natural gas section and shifted others to oil sands work.
Finally, Rick has seen this all before. And last time, the rally in natural gas prices was enormous.
In the spring of 1999, natural gas prices were around $1.70 per mcf. We were coming off 15 years of plentiful gas and low prices. It was tough to make money drilling for natural gas. Domestic production fell 5% from 1996 to 1999.
But eventually, electric power generators realized how cheap natural gas had gotten. And then a brutally cold winter hit. Demand for natural gas grew. Soaring demand and a lack of natural gas production sent natural gas prices up in a spectacular run, topping out at nearly $30 per mcf (for a brief moment).
Shares of gas producers soared. Chesapeake Energy, now one of the largest natural gas exploration companies, shot up 1,233%, in just two years. This same scenario could happen again today...
It's early days in the big trend shift. It will take years to play out, but it's coming. Natural gas prices will go higher, and investors who position themselves today will make huge gains. That's why super-investor Rick Rule is buying natural gas... while the crowd doesn't want it.
If you take a cue from Rick, and invest now, you could make 1,200% or more over the coming years.