Monday, September 15, 2008

Is There Something to the Oversupply Question?

As I was watching a TV commercial for Chesapeake Energy (for the company itself, not one of the many initiatives they push), I was struck with the thought that maybe there is something to the question of whether or not we are going to be facing a natural gas glut in this country for the near future. I'm seeing lots of articles stating this (see recent Morningstar article), but so much of mainstream business media plays a sad "me too" game that it's hard to know when we are reading real insight or something that is being rehashed for a different publication.

The stock prices of the major gas producers certainly indicate that many investors believe there is going to be an oversupply, but it is very hard to tell where the Smart Money and the Dumb Money diverge. Wall Street is obsessed with short term results at the expense of long term truths, which causes lots of unnecessary volatility in most stocks (which is in turn good for the traders). But the gas producers are getting hammered worse on a percentage basis than the decline in price of natural gas. Is that where the Smart Money comes in? Is the truth that there are oversupply issues on the horizon? If the price of natural gas goes down by much more, many onshore drilling projects will not be economically feasible. But sometimes it is easy to confuse the real Smart Money with the useless Overpaid Money that just acts on rumor and trends. There are way too many "Hedge Fund Managers" out there getting paid a lot to follow the herd.

But I keep scratching my head about Chesapeake. Are these media ads an act of ego (as I originally believed), a good strategic move to expand markets for natural gas to other uses and new markets (as I have come to believe) or an act of desperation by companies whose very existence is inextricably linked to natural gas and suddenly see a bleak future (I'm not there yet, but I'm starting to worry)?

Ultimately, I still think the fundamentals for natural gas are strong and the market is overreacting to short term trends. It's hard to hold tight when the ship looks like its sinking, but that's where the Smart Money makes a killing.

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