Last week, I told you about a potential bomb hiding in many natural gas companies…

That bomb is a big drop in the price of “NGLs.”

As we discussed, NGLs are sort of a cross between oil and natural gas. They include stuff like ethane, propane, and butane. They’re used to make chemicals and fire your grill.

Most of the natural gas explorers’ profits come from the boost they get from selling NGLs. But due to the recent shale drilling boom, we’re in danger of having a huge surplus of NGLs in America.

[ad#Google Adsense]NGLs are a local market, meaning we don’t have the infrastructure to export extra supply like we can with crude oil. If we get a surplus of NGLs, we get a big drop in NGL prices. If we get a big drop in NGL prices, we could see a big drop in natural gas stocks.

To keep us ahead of this potential risk, I’ve created a group of “canary” companies… Old school coal miners carried canaries with them to warn them of poisonous gas in the air. If the canary died, it was time to get the heck out of the mine.

If you’re a natural gas investor, you’ll want to keep an eye on these stocks. If they break down to new lows, it’s a danger sign for natural gas exploration stocks.

My canary companies have two things in common:

1. Their production is at least 18% NGLs. (This may sound like a small slice of total production, but small slices are responsible for a huge amount of production profits for many companies.)

2. Their stocks have seen rapid double- or triple-digit gains this year. (Shareholders sitting on big gains will be ready to sell and lock in profits. They’ll pull the trigger far faster than the rest of the market.)

Here’s a list of my canaries in the NGL coalmine:

This list isn’t perfect. These companies can move up or down for reasons other than the price of NGLs. But it’s “perfect enough.” These companies are vulnerable to a decline in the NGL price AND their shareholders are sitting on big gains. All four of those companies are up over 50% in the last six months.

I’m not saying natural gas stocks are set to collapse. I’m simply pointing out the risks in the sector. The best advice I’ve ever received for trading and investing in natural resources is: “Take care of your risk and the upside will take care of itself.”

By using my list as a tracking device, we can stay alert to our risk: that a drop in NGL prices will cause the volatile natural gas sector to fall 25%-50%. I’ll keep you updated in the coming months.

Good investing,

— Matt Badiali

[ad#jack p.s.]

Source:  The Growth Stock Wire