The following is an excerpt from our interview…

Bob: It looks to me as if shares of natural gas companies have some catching up to do. What’s your take?

Nathan: How do you explain natural gas surging 30% over the past month, while Encana (NYSE: ECA) — which digs up 2.8 billion cubic feet of the stuff per day — only inches up 3.8%? 

With most investors asleep at the wheel, this is a great buying opportunity.

I’m glad you alluded to the disparity between gold bullion and gold equities earlier, because that’s a prime example of how these disconnects tend to get resolved in time. It stands to reason that when a commodity rises and falls, there’s a direct correlation with the cash flows (and thus valuation) of the companies that produce it.

That relationship can deviate for a period of time, but eventually it comes back in synch — often with a violent reversal. It just takes a spark. It’s only a matter of time before this big jump in natural gas prices starts to affect the industry’s bottom line.#-ad_banner-#

If a recovery takes root, you’ll want to take action before the market begins to re-price the assets owned by Encana and others. 

Bob: What are the risks in this market?

Nathan: There are two types of risk — short-term setbacks that are of little concern to investors willing to ride them out, and long-term threats that present formidable challenges. 

Last year’s unseasonably mild winter meant fewer homeowners cranking up their heaters, and thus lower demand for natural gas… But a thermometer is a poor gauge for anything beyond the next warm front or cold snap. 

Diligent investors need to keep their eyes on bigger threats that could really tilt the playing field and do lasting damage. One potential concern is the possibility of a federal crackdown on hydraulic fracturing, or “fracking,” which would hammer producers that have invested heavily in unconventional shale plays.

However, I’ve researched this topic exhaustively and see the threat as remote. …

Furthermore, most of the oversight falls to the state level, and gas-rich states like Texas and Pennsylvania aren’t going to sabotage their own energy production with crippling regulatory burdens that sacrifice jobs and cut royalty and tax income.

Another risk that needs to be weighed is federal legislation to block liquefied natural gas (LNG) exports, to keep domestic gas out of the hands of foreign buyers. …

The opportunity to ship North America’s surplus production into higher-paying markets like Japan (where gas fetches four to five times what it does in the United States) could lift prices dramatically down the road. Blocking that gateway would be a major setback.

Again, though, the chances of that happening are slim, particularly since some export manufacturing projects have already received the green light. Nevertheless, this issue bears watching. 

Bob: What are your two favorite natural gas plays right now?

Nathan: Any short list would include Ultra Petroleum (NYSE: UPL). The Houston-based company has 5.0 trillion cubic feet of energy reserves, of which about 95% is natural gas.

Ultra’s gas production has zoomed 8,500% over the past 13 years and currently stands in excess of 250 billion cubic feet annually. But that’s only part of the appeal. 

Ultra is extremely efficient, with an “all-in” production cost of $2.88 per Mcf, far leaner than rivals that need $4 or $5 per Mcf just to break even. Not only can the company weather these soft prices and still stay afloat, but it will also pocket more cash per Mcf than almost any other producer as prices rebound.

[On Friday Oct. 12, Ultra is near $23 a share.] I don’t see anything from stopping this stock’s march back to $40 per share, where it changed hands just a couple years ago. 

Royalty trusts are another direct beneficiary of this rapid advance in gas prices. These investment vehicles allow everyday investors an opportunity to take direct ownership interest in a collection of proven oil and gas wells — without operating costs, without capital outlays, and without corporate taxes.

These trusts simply collect royalties and pass them along to investors. And the higher gas prices rise… the more cash they dish out. Chesapeake Granite Wash (NYSE: CHKR) is a strong candidate. Last quarter, the firm’s oil wells in Oklahoma gushed 3.1 billion cubic feet of gas, enough to generate $27 million ($0.58 per unit) in distributable income. 

Annualize that figure, and you’re looking at a lofty dividend yield of almost 12%. But here’s what excites me: The trust received just $1.17 per Mcf for its gas production last quarter. So even in the worst gas environment imaginable, CHKR still generated enough cash to support a double-digit yield. 

Just imagine what it will distribute over the next few quarters now that gas has rebounded all the way to $3.40 per Mcf.

Action to Take –> I think Nathan was definitely on to something in this interview, which is why I felt it was so important to share with a wider audience — and not just his Scarcity & Real Wealth readers. But natural gas isn’t the only opportunity Nathan is finding in the commodity market right now. In fact, Nathan has his eye on a situation in Russia that could dry up as much as 10% of America’s electricity supply. As the country scrambles to react, a small group of stocks could soar. And all of this could happen as soon as early 2013. For more information on the potential crisis, and how to profit, follow this link.]