Some of the savviest U.S. investors—Carl Icahn, Wilbur Ross andT. Boone Pickens—are placing big bets on natural gas companies, a movethat may backfire if bleak forecasts for the fuel play out.
The price of natural gas has risen about 20 percent from October lows,aided by wintry weather in populous areas like the U.S. Northeast. Butheavy supplies remain, leaving some to ponder whether the marketactually hit its low and whether companies with profits linked to thefuel are a sound investment.
"These guys are likely in it for the long term, just like the big oilcompanies," Michael Kay, an oil analyst with Standard and Poor's, said."They probably see the market having reached a bottom, but inventoriesare still huge so you have to wonder."
Icahn in December more than doubled his stake in Chesapeake Energy Corp. (
CHK-N 30.84 0.02 0.06%), the second-largest producer of natural gas in the United States behind Exxon Mobil Corp (
XOM-N 82.82 -0.38 -0.46%).
Pickens is backing a buyout led by EXCO Resources Inc. (
XCO-N 20.18 0.03 0.15%) Chief Executive Doug Miller, who is pursuing a $4 billion US management-led buyout of the gas producer.
Ross has steadily raised his stake in EXCO to nearly 10 percent and is considering joining the buyout as well. .
More cold weather could sharply reduce the amount of gas in storagethroughout the remaining winter months. But inventories are expected tobuild quickly in the second and third quarters as supply continues tooutstrip demand, a factor that will likely push prices lower, analystsat Ticonderoga Securities forecast.
The prolonged weak natural gas prices, which have sent many U.S. energycompanies scurrying to shift capital to oil exploration, have alsoinspired other private equity firms to bulk up on natural gas exposure.
"It's hard to believe you are going to get the kind of returns theynormally do with public equity," Ray Deacon, an energy analyst atPritchard Capital Partners, said. "But I guess public equity is veryliquid compared to private equity."
ICAHNIC
Shares of Chesapeake have jumped more than 30 percent since Icahn saidthe stock was undervalued on Dec. 17, as other investors followed thebillionaire's lead. Chesapeake is chasing more oil production and hasits 2012 gas production hedged, but its vast exposure to gas isundeniable.
"Icahn is playing into his investment approach with Chesapeake andbetting on a long-term gas recovery," Mark Hanson, an analyst withMorningstar, said.
"He might also be leaning on (Chesapeake's) management a little moreheavily to fast-track some of the value in their portfolio, but they arestill weighted heavily toward gas," he said.
Perhaps at Icahn's prodding, Chesapeake recently promised shareholdersit would stop spending billions to buy acreage and cut its debt. Mondaythe company announced it plans to sell gas assets in the FayettevilleShale in Arkansas, news that sent the company's stock 7-percent higherthat day.
Tudor Pickering Holt & Co raised its rating on Chesapeake to "buy"from "accumulate" Monday, citing the stock's potential and management'srecent steps to address its bulging debt.
Even so, a Tudor Pickering analysis in January measuring return andother factors showed Chesapeake among the bottom five in a list of 37oil and gas companies the firm follows, showing negative cash marginsand a single-digit return on capital employed for the year 2011.
Icahn did not respond to a call seeking comment on his investment in theU.S. gas company, and Chesapeake declined to comment on itsrelationship with the investor.
MARCELLUS PLAY?
Pickens, a Texas oilman and longtime cheerleader for natural gas,declined through a spokesman to comment on his interest in EXCO, citingU.S. Securities and Exchange Commission restrictions.
Ross could also not be reached to discuss his $387-million investment inthe company, but analysts speculated that his stake in EXCO might be away to participate in the buyout in a cheaper manner.
EXCO, like most other U.S. exploration and production companies, hasinvested in shale fields like the Marcellus and the Haynesville. Thosefields contain so much gas—some say shale holds more than 100 years'supply—that it has tipped the supply and demand balance in North Americaand hurt prices.
But if EXCO's plans to develop its shale assets in those fields pan out,its production and proved reserves are set to more than double, EricChenoweth, an analyst with Morningstar, said.
The management-proposed buyout likely reflects a view of the business'slong-term potential rather than the short-term negative outlookreflected in current natural gas prices, analysts said.
Others are not so bullish on the outlook for gas.
"We're drowning in gas," said a hedge fund manager who asked not to beidentified because he has had dealings with the billionaire investors."Wall Street has a very romantic notion about the natural gas business,but in reality it is a very tough business."