UNG: The Cure For Low Prices (NYSEARCA:UNG)

Investment Thesis

The United States Natural Gas ETF (NYSEARCA:UNG) is an unleveraged ETF tied to the price of natural gas.

Even though the price of natural gas is down more than 50% in the past several weeks, I don’t believe this is where this story ends.

Here’s my thesis, natural gas prices will rebound in 2023 from these low prices. And even without natural gas prices returning to the highs of 2022, there’s still plenty of upside from this price point.

Here’s why I’m bullish on UNG.

Why Natural Gas?

In time, I believe that natural gas will surpass oil as the leading source of primary energy.

What’s more, a greater use of natural gas can lower our future reliance on crude oil in many economic sectors. Abundant and affordable natural gas can eliminate all remaining uses of crude oil and refined oil products in electricity generation and space heating.

Other examples of future substitution could include vehicles used in city traffic could be converted and run on compressed natural gas.

In sum, I believe that our innovative uses of natural gas are far from over. And that in time, 2023 will be seen as the ”low” for natural gas prices.

Energy Means Progress

Despite the negative connotations of fossil-fuel energy, it’s important to realize that fossil-fueled productive ability drives progress by freeing up time and labor (meaning manpower) which leads to further increased productivity.

We couldn’t possibly exist in the world today if it wasn’t for the cheap, reliable, extremely scalable, and flexible source.

And as I’ve made the case many times already on Seeking Alpha – the EU, and other countries as part of the COP27, recognize gas as included under the EU taxonomy. It’s seen as a key transition fuel source.

The Use of Fossil Fuels

There’s no doubt that the unfolding energy transition (meaning the full or partial replacement of fossil fuels by non-carbon energies) is of utmost importance.

However, the problem is that we are extremely reliant on fossil fuels, both due to their relatively low cost, but also because we’ve developed the infrastructure to fully benefit from and function through the use of fossil fuels.

Again, I’m not talking about some small patch in California being able to transition away from fossil fuels. I’m talking about our global use across more than 7 billion people.

Energy transitions take time. The full embrace and widespread adoption of non-carbon energies will take time. Things are getting started, but we can’t be too quick to move away from our fossil fuel usage.

The Cure of Low Prices

All that being said, it doesn’t detract from the fact that natural gas prices right now are at a multi-year low.

Accordingly, I believe that with prices this low, there’s going to be less incentive for natural gas producers to produce at close to their breakeven prices. As the saying goes, the cure for low commodity prices is low commodity prices.

UNG Valuation — Things Get Tricky

Previously I believed that in 2023 natural gas prices on the spot market would average $5 MMBtu. With natural gas prices presently at half this figure, it now appears extremely unlikely that we’ll see prices jump more than 100% in the coming 10 months so that it ends up at an average of $5 mmbtu.

On the other hand, this investment doesn’t need to go up anywhere near this level for this investment to become attractive.

Indeed, if natural gas prices simply return to a normalized figure of $3.5 MMBtu that would already see the ETF rise 40% in 2023.

Put another way, there’s no need for any heroics in this ETF. Even if natural gas prices ”only” go up to $3.3 MMBtu by the end of 2023, that would still see quite an attractive return from this point.

Investment Risks

This thesis is not without risks. There’s a substantial risk that an excess amount of natural gas production could come online in the coming months. And if investors believe that there could be excess supply online, simply the expectation of this potential supply could in the short term depress natural gas prices. And this bullish investment thesis wouldn’t work.

The other noteworthy consideration is that impact of US natural gas prices is indirectly tied to the demand for natural gas in Europe, as that’s the biggest demand driver. If Europe were to suddenly increase its usage of alternative energy sources, such as thermal coal or nuclear energy, that would dampen the demand for US-based natural gas. And this would, once again, reduce the demand for natural gas.

The Bottom Line

My contention is that there’s a positive risk-reward on offer from this price point. Even though in the very near term there are risks aspects, such as we simply don’t know how quickly the Freeport LNG will be able to get back up to speed.

On the other hand, I believe that in 2024, as more and more terminal export capacity comes online, this will further support and provide a floor for natural gas prices.

In sum, the risk-reward profile here is attractive.