The "It" Energy

Inhaling it can be lethal, but when mixed properly, natural gas may breathe new life into your financial portfolio. U.S. natural gas prices, which trade at about $7 per million British thermal units, are up about 17 percent in the last year. They're off their midsummer high of about $13/MMbtu, but experts predict that natural gas investments are poised for a long-term rise, especially with a new federal administration. After all, alternative energy now carries bipartisan focus. "Energy, in general, has eclipsed Iraq as the number-one conversation in Washington," says R. Skip Horvath, president and CEO of the Natural Gas Supply Association. "That's a sea change. Natural gas will be in conversations for several years."

Why? Natural gas is a triple threat in the energy world. It's clean to produce, cheap relative to oil and plentiful--thanks to recent discoveries of so-called "unconventional" gas. Increasingly, drillers are tapping into shale deposits and coal-bed methane for new supplies. Natural gas also burns cleaner, with less than half the carbon dioxide emissions relative to coal. Plus, it's sort of patriotic. "A lot of the oil we use is derived from overseas; with natural gas, a plethora is here in the U.S.," says Steven Rogé, portfolio manager with R.W. Rogé and Co.

As with any sector in the spotlight, remember to invest cautiously. While supply grows fast, demand may or may not keep up. "Having been involved in this segment for 15 years, the crystal ball is only so clear," says Carl Kirst, senior research analyst at BMO Capital Markets. "There are a lot of different things that can move the long-term price up or down."

For risk-averse investors, the natural gas pipeline offers various stocks, from exploration and production companies to utilities. Throughout this value chain are large North American companies with rising share prices. Over the past year, Chesapeake Energy (CHK) is up 26 percent, Devon Energy (DVN) is higher by 18 percent, EOG Resources (EOG) has gained 21 percent and XTO Energy (XTO) is pretty much flat after a 70 percent spike in June. Some names have backed down after hot run-ups in 2008, so some analysts advise waiting for the next dip to scoop up shares at cheaper prices. As for natural gas exploration companies, Crimson Exploration (CXPO), based in Houston, is one of Rogé's picks. Shares are up about 6 percent.

On the fund side, some funds offer a diverse group of natural gas plays to limit risk. Among them is Fidelity's Select Natural Gas Portfolio (FSNGX), up 12 percent from last year. It invests in some 80 names, including Chesapeake and Valero Energy (VLO). The United States Natural Gas Fund (UNG) invests in a basket of natural gas-related options contracts. It's had a volatile ride in 2008, sitting far below its summer peak, and continued volatility is likely. Prices are expected to fall next year due partly to a possible glut of inventory. Imports of liquefied natural gas, for example, have skyrocketed more than 237 percent over the past six years, according to the Natural Gas Supply Association. Uncertain weather can also be a big factor, as it may shift demand.

Rogé, for one, expects a pullback soon. But he's far from giving up on the sector, saying the industry's future is strong. He dedicated about 7 percent of his firm's fund to natural gas plays vs. 3 percent last year. Says Rogé, "Looking 10 years out, whether you bought [natural gas investments] here or $5 cheaper is not going to matter much."

Farnoosh Torabi is a senior correspondent at TheStreet.com TV and author of You're So Money.