“Peak Natural Gas — Coming Shortfall Starts 1000% Rampage”

By Travis Johnson, Stock Gumshoe, March 31, 2008

This teaser comes in from a newsletter I haven’t looked at before, the Virtual Investing Club from Shane Rawlings. It’s all about a special report about Peak Natural Gas, and the likely skyrocketing price of gas from the current range of $7-10/mcf to $30 by the end of the decade.

The end of the decade is only two years away. OK, so now I’m feeling old.

Shane would like you to try a subscription to his service for $1 for the first month, but if you don’t cancel after that trial period the subscription will run you about fifty bucks a month, which is a significant cost ($600 a year), though it’s far from being one of the more expensive newsletter or advisory services (this appears to be more of a live portfolio/investor education trading service than a traditional “two picks a month” newsletter). I have no idea what their track record is, though I assume the believe it to be splendiferous.

There are lots of reasons given for why this natural gas peak will come — but primarily it’s an argument that the conventional fields, like the big Western Sedimentary Basin in Canada are running low, and that there will have to be massive investments in the unconventional gas sources. Here he’s talking primarily about shale gas, which is apparently abundant in some areas but much more expensive to access. You’ve probably heard of the Barnett Shale and the Fayetteville Shale, both of which are big, or potentially big, natural gas reservoirs, and there are others.

And the demand for services to access these difficult gas reserves is what is expected to dramatically move the price of this small cap stock.

We’ve seen these kinds of teasers before, of course, with mixed results. Big Cat Energy was supposed to have the key product that would allow for environmentally friendly extraction of the gas from coal methane beds, and so far that hasn’t worked out so well. Contango Oil & Gas is a Fayetteville Shale player that has performed very well, and Bayou Bend is one that’s a more conventional Gulf of Mexico producer that has sunk like a stone. Corac Group, the “Torpedo Technique” company that’s supposed to extract more gas from conventional reservoirs, is just about where it was the last time I wrote about them. Like I said, a mixed bag, even with natural gas having a bit of a recovery over the last few months (though it remains well below the post-Katrina highs).

But hey, maybe this one will be a winner. It is a service provider of some sort, not an actual driller, so that hits what my general preference has been for companies in this sector of late.

What specific clues do we hear?

Here’s a little extract for you:

“The ‘featured’ company in my new report ‘Peak Natural Gas’ is a world leader in helping natural gas producers efficiently extract gas from unconventional sources. Some of it’s major customers include: Dominion Resources, Energen Corporation, XTO energy, and Devon Energy.

“Forbes ranks this company as one of the best small companies you can own. But with a market cap of just over 200 million, it’s still way under Wall Street’s radar. Typically, major institutions won’t start buying until a company has a market cap of at least 1 billion. So this company could see a five-fold increase before the big boys even take notice.

“The blistering rate at which this company is growing revenues and earnings, attests to how badly natural gas producers need this company. It won’t be long before the market cap justifies institutional support. When they start jumping on board, who knows how high the stock will go. Timing is everything so don’t delay.”

So what are we looking at here?

Well, the facts and clues are few, but the Thinkolator is well rested — your Gumshoe will not be denied today! So I can tell you with some certainty that this stock must be …

Natural Gas Services (NGS)

This is actually one I’ve looked at before, but it was a loooong time ago. It briefly peaked just under $20 last Summer when Andrew Mickey touted them as the company that “turns dry wells into profits,” but then fell back to the teens and then had a nice climb, with some volatile moments, to the current price around $21. They are essentially an equipment firm, they make specialized compressors and similar gear that helps for all kinds of natural gas extraction, with a focus on the shale gas and other unconventional or challenging situations, and they lease that equipment to the drillers.

The company is right around $250 million in market cap right now, it does have those four major drillers as clients, and it is number 48 on the Forbes 200 list for “best small companies,” so I don’t imagine there’s another firm that meets these clues.

Insiders own a lot of the stock, but institutions and insiders both lightened up on their holdings a bit over the past quarter (institutions fairly dramatically so, insiders only had a couple sales of relatively small size). This is a very focused company that is really all about natural gas compressors, so it’s hard to compare them to other firms, but if we look at a firm providing similar services like Flotek we can see that NGS is growing more slowly but is priced more dearly, so you may wish to look at the details yourself. I don’t mean to say that Flotek is a better buy, NGS has better margins and a more focused business, and their last year’s growth rate is smaller than the growth of the past five years, and than the growth projected by analysts for the next five, so it’s quite likely that the comparison is unfair. On the positive side, NGS has had positive earnings surprises for the last four quarters in a row, which is always lovely.

SmallCapInvestor.com had a good overview of the positive aspects of the company at SeekingAlpha a couple months ago, if you’d like to hear some other reasons to buy the shares. And in general, it is often a very good thing when a small cap company builds through acquisition, as NGS has, to grow a dominant service provider in a small niche — sometimes it works very well, as with Middleby for commercial ovens, but that’s certainly never guaranteed. And the volatility brought by serving just one niche of the economy, as NGS does, can be signfiicant if natural gas prices swoon, or if new technologies are developed by competitors that marginalize NGS’ offerings.

I don’t know much about the company other than what I’ve shared above, but I do like profitable, largely undiscovered small caps in niche businesses that have significant insider ownership. That’s not to say that there aren’t some skeletons in the closet for these guys — if you’ve come across them, please feel free to share here.

Happy Investing, all.

full disclosure: I do not currently own shares or have any other direct interest in any stock mentioned here, and will not invest in any company mentioned for at least three days.

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Jesse Siglow
April 1, 2008 5:31 am