An Unusual Kind Of Commodity Stock That Can Return 1,000 Percent
November 4, 2010 by Scott B. Williams
How can you safely make 1,000 percent gains in the commodity market?
Back then (in 2005), I was doing my graduate work in geology. A newsletter writer friend of mine called to ask my opinion about the geology involved in projects owned by a tiny gold company called Seabridge Gold. That call resulted in a 995 percent gain.
You see, Seabridge wasn’t operating as a gold mine, and it wasn’t running an exploration program. This company’s managers were bullish on gold, so they were buying gold deposits that weren’t worth much at $400 per ounce gold but would be incredibly valuable if gold shot to $900 or $1,200.
They were "hoarding" cheap gold.
Remember… back then, the gold price was around $400 per ounce. As gold took off (as the managers expected), the value of Seabridge’s properties soared… and my friend’s readers booked a 10-bagger. It’s an incredible story on the value of hoarding cheap assets when nobody wants them.
I’m interested in this story because right now, a commodity’s sitting where gold was years ago: cheap and hated, with lots of upside.
The commodity is natural gas.
The price of natural gas has been crushed in the past few years. New drilling techniques have brought on enormous new supplies of natural gas and have sent prices from $12 to less than $4.
The price of natural gas is so low it’s not economical to drill for it, and natural gas properties are going for peanuts. There’s zero investor interest in the stuff. Everybody thinks natural gas is dead, which is when good contrarians buy with both hands. Here’s why…
China is ravenous for fuels that can fire electrical power plants, which could send coal prices much higher. If China will pay more for coal, our miners will ship it to China. The Energy Information Administration expects coal exports from the U.S. to rise 58 percent this year.
It’s neither difficult nor all that expensive to convert a coal power plant to a gas power plant. If that happens, natural gas prices will rebound. You can see where I’m going with this…
It’s time to hoard natural gas. It’s time to hoard "PUDs."
PUD stands for Proven Undeveloped Reserves. These are deposits of natural gas we know for sure are in the ground. They’re just waiting to be drilled. In a lot of cases, the stock market is offering vast amounts of cheap PUDs.
Take Rex Energy (REXX), for example. Rex is a small-cap oil and gas producer that trades for 14 times current gross profit. That’s about right for oil and gas companies, which means it’s trading just on its current production.
However, Rex also owns a huge swath of the Marcellus shale. The Marcellus is the lowest-cost natural gas field in the U.S. About 70 percent of Rex’s proven reserves remain in the ground, undrilled. The market isn’t taking that into account. That means we get all those PUDs… about 40 billion cubic feet of natural gas reserves… for free.
Should gas rise from $4 to $6 or $8 in the coming years, these assets will skyrocket in value.
Rex is no exception. There are plenty around, in the "left for dead" section of the stock market — exactly where we should be looking for new investments.
If you are patient, like the management and shareholders of Seabridge, you can turn a natural gas investment today into a huge capital gain down the road.
Editor, S&A Resource Report
P.S. One way to acquire natural gas assets is to use a unique moneymaking strategy favored by the likes of Bill Clinton… and even Barrack Obama. Whether or not you agree with their politics, you have to admit the strategy is brilliant. It’s a way to make just one investment… and then get paid over and over again. We recently put together a special video report that details this "unorthodox" income-generating secret. Click here to watch it.