EDMONTON - Many investors claim to be contrarians, but when push comes to shove few have the stomach for it.
It takes nerves of steel and superb timing to bet against the herd. And if you're wrong, you're sure to feel like an idiot.
Just ask those who went out on a limb and bought shares of fallen stars like Research In Motion or Manulife this year. Both stocks have continued to head south, bringing nothing but misery to investors who tried to do some bottom fishing.
Which brings us to the ultimate contrarian play: natural gas. Given the sharp plunge in gas prices over the past two years, and the huge overhang of new shale gas supplies, Martin King was one of the few pros who remained even modestly bullish on the clean-burning fuel.
But FirstEnergy Capital's veteran commodity guru has finally joined the bearish camp, slashing his forecast for natural gas prices right through 2013.
King now predicts an average NYMEX (New York Mercantile Exchange) price of just $4.63 US per MMBtu (million British thermal units) this year, down from a previous estimate of $5.
For 2011, he sees prices averaging $4.75, and for 2012, King sees an average price of just $5. The revised figures are down $1 and $1.25, respectively, from his previous estimates.
Even by 2013, a full three years out, King sees little upside. He expects NYMEX prices to average just $5.25 -- more than 40 per cent below the average 2008 level, and below the price most producers need to break even.
Natural gas is now trading in the $3.80 range in New York, a dime above the new 52-week low, set just last week.
King's outlook for AECO (Alberta) gas prices is even gloomier. He sees spreads widening between AECO and NYMEX, resulting in an average Alberta price of just $4.15 (Cdn) per thousand cubic feet this year, rising to $4.24 next year and only $4.86 by 2013.
If King's projections are accurate, Alberta's treasury will get smacked as gas royalties dry up -- although the impact may be mitigated by recent royalty changes.
"In book one of Dante's The Divine Comedy, there is an inscription at the entrance to Hell that reads, 'Abandon Hope All Ye Who Enter Here,' " King told clients in a report issued Monday.
"This might nicely (capture) what is becoming the state of the natural gas market. Although Dante had to deal with several beasts prior to his entering the Underworld, one of the beasts that should be added to the hell of the current natural gas market is a dragon. Specifically, a supply dragon."
With supplies of U.S. -- and Canadian -- shale gas continuing to swell, drilling activity rebounding, the U.S. economic recovery in danger of stalling and LNG (liquefied natural gas) imports on the rise, all signs point to a prolonged period of weak prices, King says.
Until rig counts drop, drilling slows, and weak natural gas prices force producers to curtail supplies, he figures natural gas investments will amount to "dead money" for the foreseeable future.
Earlier this year, King forecast a modest price rebound by 2011, based on expectations that the rapid growth in supplies over the past two years would slow.
"That has just not happened. If anything, the latest U.S. natural gas supply data are showing signs of accelerating thanks to a gas rig count which has refused to die," he says.
"This has set the stage for what has been a steadily deteriorating price picture in the third quarter, and forward pricing prospects which have undergone a sharp retrenchment in the past month."
As a result, FirstEnergy has also cut its cash flow estimates and 12-month target prices for energy stocks like Encana and Canadian Natural Resources.
Analyst Michael Dunn's revised target price for Encana is $33 US, down from $37 previously, while his target price for CNRL has been slashed by $3 Cdn to $44.
FirstEnergy is just the latest brokerage firm to slash its outlook for natural gas prices. Two weeks ago, UBS Investment Research reduced its average NYMEX price forecast for 2010 to $4.65 US (from $4.80), and its 2011 projection to $5 (from $5.50).
UBS is also calling for weaker prices in 2012 and 2013. Its revised projections are for average prices of $5.50 and $6, respectively, down from a prior forecast of $6.50 for both years.
Like FirstEnergy, UBS notes that U.S. gas supplies continue to accelerate -- they're currently on track to grow about 5.5 per cent this year, versus 2009 -- even in a weak pricing environment.
"We assume this level of supply growth would overwhelm demand, and prompt a reduction in prices to limit drilling activity," it concludes in a recent report.
As a result, UBS has also cut its stock market target prices for such gas producers as Encana, Canadian Natural Resources, Nexen and Talisman, with Encana taking the biggest hit.
The steady drop in natural gas prices has left few true contrarians in its wake.
Veteran Texas energy guru Henry Groppe is one of the few who predicted a rebound in prices in recent months. In the spring, he told financial reporters the impact of shale gas supplies was wildly exaggerated and production would "inexorably decline."
It's not clear whether Groppe is still bullish on natural gas. He didn't return the Journal's call on Monday