Investec energy duo predict gas boom

Highly regarded Investec Asset Management energy duo Jonathan Waghorn and Mark Lacey are running an overweight position in the ‘deeply distressed’ gas sector.

Waghorn and Lacey, who run Investec's Global Energy and the long/short GSF Enhanced Global Energy funds, are more cautious on crude in the short term.

The pair believe the current oil price of about $82 a barrel is at the higher end of its 2010 trading range and would not be surprised to see the cost of the commodity to fall to about $75 in the near term. Within that context they still see value in large cap oil producers globally but the real outstanding value centers around pure play US gas producers.

Waghorn and Lacey are much more bullish on natural gas however. Waghorn says traditionally oil trades at 8 to 9 times higher than gas, but it is currently more than 23 times. The manager expects increased M&A activity will also boost the sector.

"The gas market is on its knees," Waghorn says.

"Current US gas prices of $3.41 per thousand cubic feet (mmcf) are currently well below the cash cost of supply for this commodity.

"Company actions and company data support our view that the marginal cost for gas extraction is around $7.00/mmcf. Extracting gas at less than $4/mmcf simply does not make an economic return.

"The cash cost of supply for gas prices, even in the new shale projects which are being viewed as sources of cheap gas and potentially the future energy solution for the US, is at least $4/mmcf. We think this underpins the current value to be found in this sector."