A strengthening dollar means commodity prices will decline. This will be negative for my oil and gas investments. A major part of my thesis was the fact that natural gas exploration and production companies were not reflecting the increase in the Henry Hub natural gas benchmark. Unfortunately, before natural gas producers have had a chance to respond to the change, natural gas prices have begun to descend, as expectations for the Federal Reserve’s end of QE3 push the dollar higher.

I have purchased producers that stand at a discount of 50% or more of their book value, which I believe is a reasonable margin of safety to insure against declines in the price of natural gas down to levels closer to $3.50. However, the major impetus for a rise in the stocks is being weakened, so I cannot justify purchasing more of these companies, UNLESS they have price hedges to secure the sales price of their gas.

Constellation Energy Partners appears to fit this bill on first glance, so I am doing more research to investigate. Penn Virginia, however does not have these prices hedges, but trades at a greater discount to book value. I believe these stocks are insulated from extreme declines, but the strength in the dollar is lowering the upside potential.

 

Disclosure: I am long PVA. I may purchase shares of CEP in the next 72 hours.

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