X-Message-Number: 21875
From: "Mark Plus" <>

Subject: Bloomberg: Natural Gas Prices May Threaten Chemical Stocks: John 
Date: Wed, 04 Jun 2003 08:29:29 -0700

You might want to read this in conjunction with Jared Diamond's article on 
"The Last Americans: Environmental collapse and the end of civilization," in 
the June '03 issue of Harper's magazine (Mark Plus):


John Dorfman , president of Dorfman Investments in Boston, is a columnist 
for Bloomberg News. The opinions expressed are his own. His firm or its 
clients may own or trade investments discussed in this column.

Natural Gas Prices May Threaten Chemical Stocks: John Dorfman
June 4 (Bloomberg) -- President George W. Bush has pronounced himself 
``greatly'' concerned about a shortage of it.

Federal Reserve Chairman Alan Greenspan said he's ``quite surprised at how 
little attention'' it is getting.

``It'' is the U.S. supply of natural gas.

And right now I'm interested in the continuing rise in the price of natural 
gas, which I believe is headed higher over the next five years because the 
U.S. faces a shortage.

The U.S. consumes about a quarter of the world's natural gas, making it a 
$71 billion market. If natural gas prices rise into the $7 to $9 range over 
the next few years, that will have all sorts of effects. For example, 
natural gas is an important cost for chemical makers and fertilizer makers. 
That's why I have sold short (bet against) some chemical stock holdings.

Natural gas sold for less than $2 per million British thermal units (BTU) as 
recently as March 1999. It passed the $4 barrier in May 2000 and moved above 
$5 at times in 2000 and 2001. Today the price is roughly $5.90.

Last year, gas prices were high enough to encourage drilling. Indeed, both 
U.S. and Canadian companies increased their drilling. Yet many companies 
found less gas than the year before because it is getting harder to find.

Greenspan said in Congressional testimony on May 21 that the natural gas 
problem ``is a very serious'' one.

He cited ``very tight supplies'' and mentioned ``the inability of heightened 
gas well drilling to significantly augment'' production. He noted that 
``working gas in storage is presently at extremely low levels.''

The Fed chairman concluded, ``Something has to give, and what is giving of 
course is price.''

Importing Increases

It is cumbersome to import natural gas, because that typically requires 
cooling the gas to minus 260 degrees Fahrenheit (minus 162 degrees Celsius), 
turning it into liquefied natural gas, or LNG. Several energy companies, 
including ChevronTexaco Corp., Marathon Oil Corp., Sempra Energy and El Paso 
Corp., are investing more than $3 billion in depots to handle LNG imports. 
(I own call options on El Paso.)

Analysts expect LNG imports to triple their share of the U.S. market to 6 
percent by 2005. But even then the imports would account for only about 6 
percent of U.S. consumption.

As for the impact of a rise in natural gas prices on the chemical industry, 
recently, in my highest-risk account, I sold short a trio of chemical 
stocks, betting they will decline. My biggest bets are against Millennium 
Chemicals Inc. and Lyondell Chemical Co. I also sold short some Dow Chemical 
Co. shares.

Millennium said in February that it is raising prices on its adhesives, 
paint, packaging, film, rayon and other products, to reflect rising gas 
prices. Apparently it can't raise prices enough, or fast enough. It reported 
a loss of $51 million in the first quarter, compared with a profit of $45 
million in the previous quarter.

Impact on Fertilizer

For 2002, Millennium posted a return on shareholders' equity of negative 42 
percent. The company has total debt equal to more than 3 times its equity.

Lyondell reported a $113 million loss in the first quarter. It has lost 
money in eight of the past 10 quarters and has debt well over 3 times 

I regard Dow as a stronger company than Millennium or Lyondell. It has 
posted a profit in seven of the past 10 quarters, and its total debt is 178 
percent of equity - high in my book but lower than that of the other two.

One reason I included Dow in my package of chemical- industry shorts is that 
insiders have sold about $1.5 million of stock in the most recent 45 days, 
as measured by the Bloomberg database. That's above the typical selling rate 
of $1.2 million.

Most fertilizer makers also depend on natural gas as a raw material, and 
suffer when gas prices rise. I am selling short IMC Global Inc., the world's 
largest producer of phosphate fertilizer.

IMC has debt equal to five times stockholders' equity. By contrast, about 
two thirds of U.S. companies have debt less than equity. IMC has posted a 
loss in seven of the past 10 quarters.

Who Gains

Rising natural gas prices, however, wouldn't pound down everything. Some 
industries would benefit.

I own shares in several natural gas producers, such as Devon Energy Corp., 
Apache Corp. and St. Mary Land & Exploration Co.

If gas prices climb as I anticipate, some utilities and industrial plants 
will switch to other sources of power. This will give a boost, I believe, to 
coal and nuclear stocks.

Based on this rationale, I currently own call options on three coal stocks: 
Arch Coal Inc., Massey Energy Co., and Peabody Energy Corp.

Their debt-equity ratios, for the most part, are weaker than I typically 
like, but stronger than those of the chemical companies. Their earnings 
records are speckled, but not too bad: Arch, for example, has posted a gain 
in seven of the past 10 quarters.

The only nuclear stock I currently own is Cameco Corp., a Canadian company 
that produces about 17 percent of the world's uranium. I am on the lookout 
for more nuclear-energy stocks to buy.

Last Updated: June 4, 2003 10:22 EDT

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