Earlier today, I lit the fuse over which energy bet to take.

By the time the smoke cleared, my friend had taken an adamant stance against any such comeback.

“It’s taken such a beating, there’s no chance it’ll ever recover.”

I won’t hold it against him. The idea of holding a stock for more than a few hours would make some day-traders like him uneasy. A week would make him cringe. Long-term prospects didn’t even register as a blip on his radar.

To a certain extent, he’s right to be cautious. If there’s a market that has taken a brutal beating over the last three years, it’s natural gas.

We’ve heard just about every excuse in the book for weak prices, too — be it weather-related problems, a supply glut overwhelming demand, or even the raging controversy over hydraulic fracturing. And we can’t deny that prices are dirt cheap.

What my friend failed to see, however, is opportunity.

Drilling Shifts and Price Shocks

He isn’t alone in his pessimism toward natural gas.

In turns out some of the biggest U.S. producers have been forced to adapt to stale prices.

Chesapeake Energy, for example, is the second-largest natural gas producer in the United States. With natural gas prices in the basement, Chesapeake expects to spend three-quarters of its capital expenditures developing their liquids-rich plays.

That’s an about-face in spending, considering 90% of capital expenditures in 2009 was slanted towards their natural gas assets… Prices plummeted nearly 80% between 2008 and 2009 and are now stagnant, trading between $4-$5/Mcf for the better part of a year.

Now is the perfect time to get bullish.

Why We’re Long on Natural Gas

First on the list concerns our drilling activity.

You see, Chesapeake isn’t the only company gearing more toward their liquids-rich assets. Approximately 53% of the 1886 rigs operating in the United States are drilling for oil.

Meanwhile, natural gas consumption is only moving higher…

We’re already above our 2008 consumption levels — at which time, prices were at record highs. That year, the U.S. consumed about 23 Tcf of natural gas. The subsequent price drop led to a 1.7% decline in demand during 2009. Last year, however, our demand reached 24.1 Tcf — a new record.

Although production grew 3% between 2009 and 2010, things could get much tighter from here on out.

As you can see, we have more producing gas wells than ever before:

With the lack of drilling over the next few years — due to both weaker prices and companies changing their drilling priorities — the United States won’t be able to continue increasing the amount of natural gas wells, easing the current supply-demand imbalance.

Now imagine how tight things will become if shale opponents come out on top. Almost half of our natural gas production is expected to come from shale formations by 2035.

According to the latest report by the INGAA, natural gas consumption is expected to increase by 1.6% each year for the next twenty-five years. By 2035, demand from both the U.S. and Canada is estimated to be 110 Bcf per day, or nearly 40 trillion cubic feet per year. Approximately three-quarters of that demand growth will come from the power sector.

Of course, any hope of ever reaching that amount is impossible without developing the various unconventional gas plays across North America.

Furthermore, shale gas is projected to make up more than 90% of our unconventional production increases.

Supporting that production growth won’t be cheap. The report estimates over $8 billion per year will need to be spent on infrastructure alone.

The Ultimate Bet in Natural Gas

At first glance, the ultimate contrarian bet in natural gas would be the United States Natural Fund (NYSE: UNG), which appears to mirror the performance of natural gas prices.

Any of us who have dipped our hands in UNG in the past might want to turn away. This is easily one of the most painful charts to view:

Things may not improve much for this ETF.

A sudden spike in natural gas prices isn’t in the stars; prices are expected to average between $6 and $8 per MMBtu until 2035.

But there are much better opportunities becoming available — including one that can clear the air of controversy over unconventional production.

Many of my readers have had tremendous success with a play that doesn’t own a single acre of land. Instead, this outfit offers an alternative to hydraulic fracturing.

Imagine tapping into 2,552 trillion feet of potential gas resources from shale formations without using a single drop a water…

Until next time,

Keith Kohl
Editor