UNG Sets 4-For-1 Reverse Share Split

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February 07, 2012
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UNGUnited States Natural Gas Fund LP
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Plunging gas prices lead to UNG’s second reverse split in a year.

 

U.S. Commodity Funds, the company behind some of the earliest futures-based commodities ETFs, is planning a 4-for-1 reverse split on its United States Natural Gas Fund (NYSEArca: UNG) to pump up a share price that has fallen by more than half in the past year and by nearly 96 percent since its high in the summer of 2008.

UNG shares, which closed 2.3 percent higher on Monday at $5.45 a share, have fallen close to the $5 threshold considered to be important for listed securities. It’s the second reverse split the company has done in a year. It performed a 2-for-1 split about a year ago, again because gas prices had fallen.

The reverse split, which will be effective on Feb. 22 for shareholders of record as of the Feb. 21 close, will quadruple UNG’s price, the company said on its website. Based on today’s price, that means UNG would be trading somewhere in the neighborhood of $22 a share. The split will leave UNG with a quarter of its current shares.

As much as 80 percent of UNG’s price decline in the past year is linked to falling natural gas prices, with the rest attributable to so-called contango in futures markets, which eats into returns, John Hyland, U.S. Commodity Funds’ chief investment officer, said in a telephone interview.

“Really it’s all about fracking,” Hyland said, referring to the “hydraulic fracturing” drilling technology that has unlocked so much new gas supply in the past few years. Indeed, prices have cratered, leading big players in the industry to start scaling back exploration and production efforts for fear of selling gas at too slim a profit.

Gas futures prices are now about $2.41 per million British thermal units, according to information posted on CME Group’s website, compared to as high as around $15 per million BTUs in the summer of 2008 before the market crash.  That’s about an 80 percent decline, compared with UNG’s 96 percent decline over the same period.

Corrosive Contango

While a smaller piece of UNG’s price decline than gas itself, the contango in the gas market isn’t to be dismissed. Also referred to as a “normal” futures curve, it’s a condition when the most immediate contract to expire is also the cheapest.

That means that when UNG’s fund managers roll exposure from the front-month contract to the next-expiring contract by selling  one and buying the next one, they are paying a slightly higher price for the new contract than what they fetched for one they sold.

This “negative roll yield” comes out of investors' pockets and, over time, creates a significant drag on returns.

UNG, which only holds the soonest-to-expire, front-month contract, has gathered about $900 million in assets since its 2007 launch.

 

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