Buy These Natural Gas Stocks BEFORE Exports Increase

Let's face it: natural gas prices are low. Very low. Despite the recent three-week rally in futures, prices remain in the gutter.

The recent rally in futures prices came on the heels of reports that domestic supplies dropped and that more than one company announced that it would curb output due to low prices. Most analysts believe the price jump is temporary and that natural gas prices will likely return to recent 10-year lows.

But price is only one part of the story. We may well be witnessing a revolution in the domestic natural gas market. And investors need to know where to look in order to profit.

The revolution is that the United States is on the precipice of becoming a net exporter of natural gas, as opposed to being the net importer we seemingly always have been.

One of the key components of the natural gas story has been the improved technology and the unnecessarily controversial method of extracting gas from the ground called "fracking." This has been a driving force behind the increasing large stores of gas in the United States and the historically low prices.

Without getting to deep in the mud, it logically follows that producers will have to cut back production because the cost to produce each unit of natural gas compared with the market price makes it unprofitable to manufacture. They must either do that or find more potential buyers... These buyers have already been identified, but the producers do not have total control over the decision to sell or not to sell to overseas buyers. This must come from the Department of Energy. Thankfully, it's looking like Energy Secretary Steven Chu is leaning toward allowing exports to be increased.

And this is where the opportunity for investors lies: Overseas.

  While recent developments in Iran underscore potential global challenges to the oil market, this will likely thrust U.S. natural gas producers to the forefront of the global energy supply chain. Stubbornly high oil prices combined with restricted supply from certain areas of the globe will likely exacerbate the push toward natural gas. 

But with what can be considered a glut of natural gas in the United States, a debate is ongoing as to whether or not, and if so, how much natural gas should exploration and production companies be allowed to export. Hopefully a lot, because this is where the new buyers are, and it's also the best chance investors have of profiting.

With supplies abundant and prices likely to move lower in the near-to-medium term, the real play in natural gas is in companies whose businesses are not directly impacted by prices or will benefit from an increase in export activity.

Here are my three favorites...

Kinder Morgan Energy Partners (NYSE: KMP) -- Kinder Morgan is a master limited partnership (MLP) with about 38,000 miles of pipeline for oil and natural gas. The MLP acts more like a toll-road operator because charges fees and has less exposure to the underlying price of the commodity being transported. As a kind of transport company as well as being an MLP, Kinder Morgan is a conservative play, but it yields a healthy 5%.

Cheniere Energy Partners (NYSE: LNG) -- Cheniere is a play on the potential execution of the company's plan to begin exporting liquefied natural gas from the U.S. Gulf of Mexico by the end of 2015. Given the oversupply in the United States, as noted above, exporting could become a very lucrative business if the domestic use of the fuel isn't embraced rapidly.

KBR Inc. (NYSE: KBR) -- KBR builds liquefied natural gas (LNG) terminals. The company has designed over half of the world's liquefied natural gas production capacity in the past 30 years, and the liquefied natural gas business represents about 30% of KBR's revenue.

What to avoid...
While there are numerous natural gas-focused exchange-traded funds (ETFs) and exchange-traded notes (ETNs), the issues with price are likely remain. And since most of these securities are tied to price, it might be a good idea to avoid them. Unless the United States allows so much natural gas to be exported that prices rise due to a supply shortage, the best path to profit in this space is to avoid pure plays on price.

Risks to Consider:  If the attempts to increase natural gas exports are thwarted, then the shares of these stocks may not rise. Cheniere Energy Partners is the most sensitive to this issue because it has spent a lot of time and money on building up its infrastructure to take advantage of potential exporting opportunities through the Panama Canal.