I believe, given the importance of energy in the world, that most portfolios should have exposure to the sector. In fact, I believe that energy companies are frequently undervalued, which explains why the energy sector usually makes up the largest share of my portfolio.

Following some slides that provided a portfolio update covering 2013 through Q1 2014 — and we are outperforming the Energy Select Sector SPDR (NYSE: XLE) — I launched into the natural gas story. I started by orienting the audience to the largest oil and gas shale plays in the Lower 48:

For oil production, the household names are the Eagle Ford in Texas and the Bakken Formation in North Dakota. The Permian Basin in West Texas is also a rising shale star, although it has already produced billions of barrels of conventional oil since the 1920s.

The big names in shale gas are the Marcellus and Utica shales in the northeast, the Haynesville Shale that underlies parts of Arkansas, Louisiana, and Texas, the Barnett Shale located in north central Texas (south and west of Dallas), and the Woodford Shale of western Oklahoma and Texas.

I then moved on to the reasons that I believe natural gas producers in the US will be good long-term investments. The biggest driver over the next decade will be the start-up of LNG export terminals, which should start to ship out LNG late next year. Even if only a quarter of those applying for licenses ever export any LNG, the price movement should benefit all domestic natural gas producers.

Regulatory drivers will also be important. Despite court challenges, US Environmental Protection Agency (EPA) regulations on mercury and other toxic substances will force the closure of a number of coal-fired power plants. These will most likely be replaced by gas-fired power. The EPA recently upped its estimate of coal-fired power likely to be retired over the next five years by about 50 percent to 60 gigawatts.


Likewise, the EPA has proposed limits on carbon dioxide emissions for power plants. And while these limits are also being challenged in court, I believe it is likely that they will be upheld, and this will continue to shift the balance of power production away from coal and toward natural gas.

My investment thesis over the past year has been that these long-term drivers would boost natural gas producers, but that it could take a year or two before the market broadly recognizes the opportunity. I noted that it is always possible for short-term factors like an unseasonably warm winter to briefly override the long-term drivers, but that patient investors should be rewarded.

Investors didn’t have to be patient for long.

I explained the nature of natural gas storage in the US, where demand is seasonal and inventories are depleted during the winter. The 2013-14 winter was unusually cold, and the resulting natural gas withdrawal from storage was the largest on record: