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First Belief FCG ETF: Pure Gasoline Has Extra Upside (NYSEARCA:FCG)


Jun 20, 2022
image 155145823

ImagineGolf/E+ through Getty Photographs


It is time to speak about one of the crucial essential topics of 2022: pure gasoline. In a latest article protecting pure gasoline large EQT Corp. (EQT), I mentioned the significance of liquid pure gasoline (“LNG”) in gentle of the ongoing power disaster. On this article, I’m going to elaborate on that based mostly on new developments and clarify why I consider that this uptrend is not exhausted.

Within the second half of the article, I’ll spotlight a means for buyers to profit from increased pure gasoline costs with out having to purchase a moderately costly pure gasoline (commodity) ETF, or expose themselves to single inventory selecting: the First Belief Pure Gasoline ETF (NYSEARCA:FCG)

Moreover, my aim is to distribute common data because the pure gasoline scenario is essential for each macro playbook – even if you happen to do not need to commerce pure gasoline shares.

Europe’s In Bother

As a European citizen and author of a day by day European macro e-newsletter, this is a matter I have been on high of since 2021. I am speaking after all concerning the power disaster.

Whereas I’ve lined the power bull case since 2Q20, one thing modified in 2021. Within the final months of 2021, Putin began to strain Ukraine earlier than invading the nation on the finish of February of this yr.

The graph beneath reveals the benchmark for European pure gasoline: Dutch TTF futures. On this case, I used TTE futures, which have completely different items. On this case $ per MMBtu. This fashion it is akin to US-based Henry Hub futures.

Please be aware that I exploit two completely different y-axes within the chart beneath. Henry Hub (orange) is NOT dearer than TTF/TTE (black). As a matter of reality, European pure gasoline is 5.2x dearer than US-based Henry Hub, which provides you an thought of how dire the scenario is in Europe.

TTE & Henry Hub


Previous to the struggle, the European Union obtained 30% of its pure gasoline from Russia. Germany, Europe’s industrial coronary heart with vital pure gas-intensive chemical publicity obtained 40% of its gasoline from Russia as it’s residence to the Nord Stream 1 and notorious Nord Stream 2 (this one is canceled) pipelines.

Europe nat gas dependence


Proper now, Russia has numerous leverage over Europe as it might cut back exports of pure gasoline. Enterprise insiders and firms like BASF have made clear {that a} decline in pure gasoline might trigger manufacturing to halt, which might affect each single provide chain in Europe and past.

My aim is to not get individuals upset, however I consider {that a} scenario of power rationing would set off provide points far worse than the preliminary COVID lockdowns.

Primarily based on that context, Russia is decreasing exports. The TTF/TTE chart I included on this article reveals a major enhance in gasoline costs because of decrease exports.

Russia slashes gas flows

Wall Road Journal

In response to the Wall Road Journal:

Berlin stated gasoline provides had been safe and that it might procure the lacking gasoline from different sources, although at increased costs. However the discount in Russian provides will make it tough to fill gasoline storage forward of winter, probably leaving factories and households throughout the continent in peril.

That is going up to now that politicians and enterprise representatives in Germany are actually pushing to cut back pure gasoline utilization. The quote beneath is translated from a latest Handelsblatt article:

The hazard of an acute gasoline scarcity continues to escalate, Seyfert warned. Russia has decreased its gasoline provides via the Nord Stream 1 pipeline in two steps since 13 June. For the primary time for the reason that finish of March, the Federal Community Company described the scenario as “tense” in its day by day report on gasoline provide in Germany.

“Within the present scenario, gas-fired energy crops that solely generate electrical energy have to be changed instantly by different energy crops from present reserves,” stated business consultant Seyfert.

Germany is about to throw its plans for a fast renewable power transition out of the window as it’s near boosting coal power manufacturing with a purpose to enhance pure gasoline inventories forward of what could possibly be a chilly winter.

Therefore, and to return to the Wall Road Journal article, Germany and its European companions are sourcing pure gasoline imports from different nations – just like the US – though its infrastructure doesn’t help increased imports but (Europe actually can’t catch a break).

Europe’s choices are restricted within the quick time period. Authorities and firm officers have scoured the globe this yr for different sources of provide, placing offers within the U.S., Egypt and Israel whereas securing increased volumes from producers together with Azerbaijan and Norway. However the continent’s infrastructure for importing liquefied-natural gasoline is near maxing out, merchants stated, and is in any case distributed erratically across the area.

In different phrases, Europe is in hassle, which is nice information for pure gasoline demand.

Pure Gasoline Provide/Demand

Europe is a significant a part of the pure gasoline bull case, however it’s not all the things. Usually, pure gasoline is seeing an enormous tailwind because of sturdy home (US) and abroad demand. In response to Shell knowledge that I mentioned in my latest EQT article:

Asian demand, for instance, is anticipated to account for 70% of worldwide LNG demand by 2040. In 2021, China was the world’s high importer, accounting for nearly 80 million tonnes of LNG. In 2040, international LNG demand is about to exceed 700 million tonnes. In Brazil, demand tripled resulting from increased hydrogen manufacturing. Complete LNG commerce was 380 million tonnes in 2021. A rise of 21 million tonnes over 2020.

Shell LNG outlook (2022)


Mainly, LNG is liquified pure gasoline. It is the one means the US – or every other nation – can export pure gasoline with out using pipelines. For instance, pure gasoline is produced in Texas, it’s despatched to an LNG facility on the coast the place it’s liquified. It’s then shipped to Europe or Asia the place it’s become a gasoline once more.

The demand facet is obvious.

  1. Pure gasoline is cleaner than coal, which makes it a incredible supply to cut back air pollution.
  2. Asia can use it to decrease large coal demand, whereas Europe can use it to smoothen the power transition
  3. The identical goes for the USA and roughly each energy-intensive nation
  4. Europe is coping with geopolitical points that speed up the necessity for imported gasoline/LNG.

The large challenge is that offer is anticipated to lag. On the suitable facet of the Shell overview above, the corporate reveals that it expects provide to fall within the years forward. It doesn’t give us numbers, however the pattern is obvious.

For instance, as I discussed on Twitter, pure gasoline manufacturing is peaking:

natural gas production is peaking

Twitter (@Growth_Value_)

The graph beneath reveals that the shale revolution within the US has ended. Since 2020, manufacturing development charges in all main basins have slowed, resulting in subdued manufacturing development.

Monthly Dry Shale Gas Production


That is the longer-term outlook, which does venture development of roughly 10 trillion cubic ft, however subdued development charges.

US natural gas production


To offer you just a few examples of provide points, EQT – America’s largest pure gasoline producer – visualized the affect of points like inadequate pipeline capability on pure gasoline costs. Word how the shale revolution offered the US and the world with low-cost and dependable pure gasoline. That’s now altering.

EQT 1Q22 Earnings Presentation

EQT Corp.

Antero Sources (AR), is asking the present surroundings “shale 3.0”, which is a good title for the shift from manufacturing development to free money move technology. As I defined in a latest article protecting power large Exxon Mobil (XOM), producers of each oil and gasoline are emphasizing free money move as a substitute of manufacturing. That is the results of regulatory and social strain on these firms. The federal government within the US has made clear that it needs to do away with oil in the long run. With a purpose to defend themselves and buyers, oil and gasoline firms are constructing fortress stability sheets and money move streams that present room for dividends, buybacks, and additional debt discount. Evidently, all of that is additional pressuring provide development.

Antero Resources shale 1.0, shale 2.0, shale 3.0

Antero Sources

With that in thoughts, there’s one other challenge that must be mentioned.

The Freeport Fireplace

As the primary graph of this chart confirmed, prior to now two weeks, US pure gasoline crashed whereas European TTF soared increased.

This is because of a hearth at considered one of America’s largest LNG export services. Final week, the Houston Chronicle reported that Freeport could possibly be offline till “late 2022”. I’ve heard rumors that it could be offline till September.

It is a big deal. The chart beneath reveals the importance of Freeport in relation to complete US LNG exports.

Monthly US LNG exports


The ability produced roughly 2 billion cubic ft of LNG per day. Most of it went to Europe. For the reason that Russian invasion, Freeport volumes despatched to Europe soared by 44%. Proper now, it is a worst-case situation as Europe is scrambling for extra LNG provides – therefore the enhance in TTF/TTE costs.

I consider that the decline in Henry Hub is non permanent as markets have priced within the injury Freeport has finished. In any case, decrease exports imply that extra pure gasoline stays within the US. That briefly causes extra provide, therefore decrease costs.

So, find out how to profit from this dip and in the long run?

First Belief Pure Gasoline ETF

There are a number of advantages of ETFs. Probably the most easy is to keep away from inventory selecting. It is why index ETFs are such an important instrument for retail buyers. Nonetheless, ETFs are additionally an important instrument to trace or commerce commodities. Within the case of the FCG ETF, the ETF doesn’t maintain commodity futures however pure gasoline shares.

In response to the First Belief web site:

  • “The Index is comprised of exchange-listed firms that derive a considerable portion of their revenues from the exploration and manufacturing of pure gasoline.
  • The Index is constructed by establishing the universe of U.S. listed shares of firms concerned within the exploration and manufacturing of pure gasoline. Corporations whose pure gasoline proved reserves don’t meet sure necessities are eradicated.
  • To satisfy Index eligibility, a inventory should additionally fulfill market capitalization, liquidity, and weighting focus necessities.
  • All eligible working firms and Grasp Restricted Partnership (“MLP”) shares are ranked on each liquidity and market capitalization inside their segments.”

The chart beneath reveals the ETF (black line) versus Henry Hub pure gasoline (orange).

FCG versus Henry Hub


The 30-Day SEC (dividend) yield is 1.6%. The expense ratio is 0.60%, which is moderately excessive. Nonetheless, the expense ratio of the most important ETF monitoring pure gasoline futures (UNG) is 1.35%.

Furthermore, over the previous 3 years, FCG has outperformed UNG by a moderately large margin as producers typically outperform the commodity they produce.

FCG ETF price change
Knowledge by YCharts

One other essential level is that FCG is well-diversified. It has no holding with greater than 4.6% of complete publicity. The variety of complete holdings is 49. The whole internet property of the ETF are roughly $800 million with a day by day quantity of 4.3 million shares.

FCG ETF holdings

First Belief

The one drawdown is {that a} 0.60% expense ratio is loads for a long-term funding. Therefore, buyers who need long-term publicity could should search for single shares in spite of everything. In that case, I wish to seek advice from my EQT article, which I discussed within the introduction of this text.

Furthermore, buyers ought to keep a detailed eye on their publicity. Pure gasoline and its producers are unstable. I’ve 20% complete power publicity (oil, gasoline, refineries), and consider that is greater than sufficient because it provides loads of volatility to my portfolio. Please concentrate on these dangers earlier than including any power publicity to your portfolio.


The pure gasoline bull case took successful final week because the Freeport hearth triggered anticipated exports to plummet. It additionally did not assist that the market was promoting off, sparking fears that demand could also be broken by decrease financial development expectations.

Nonetheless, pure gasoline stays in a powerful long-term bull market with upside expectations attributable to a dramatic power scenario in Europe and demand competitors from Asia.

I consider that costs will recuperate within the second half of this yr, which is able to profit drillers and associated firms in the USA.

Provide will stay subdued, and I do not see a means for provide to meet up with rising demand. Not within the supply-constrained surroundings, anyway.

The First Belief Pure Gasoline ETF is a helpful solution to play the continued uptrend. It follows Henry Hub costs carefully, it has a comparatively low expense ratio, a 1.6% dividend yield, and a well-diversified basket of US-based drillers that more and more concentrate on free money move and associated shareholder distributions.

FCG price Chart


With that stated, and as I discussed within the article, please bear in mind that power (normally) is unstable. Please keep conservative publicity if you happen to determine to purchase any power inventory. Particularly within the ongoing market surroundings it is not possible to say that there is not an opportunity of one other drawdown to $20, within the case of FCG.

Aside from that, I stay bullish because the ranking of this text suggests.

(Dis)agree? Let me know within the feedback!

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