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UNG Sets 4-For-1 Reverse Share Split

Cinthia Murphy and Olly Ludwig


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 - News) 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.



Where’s The Gas Market Heading?

Contango typically reflects a market that has ample supplies, which is precisely what’s going on gas markets these days. All the fracking-derived gas has inundated markets.

Hyland isn’t speculating on the commodity’s price direction, but he did tell IndexUniverse that a few variables are worth keeping in mind that could cause supplies to become less abundant in the near term, which, in turn, would cause gas prices to firm up.

One is that gas wells unlocked by fracking might end up having shorter productive life spans than the eight- to 10-year period associated with most traditional gas wells, he said. That would mean all the extra gas on the market might be more short-lived than some are expecting, which would help firm up prices.

Another factor is that some of the environmental concerns raised by fracking—such as pollution of groundwater with chemicals used in the drilling process—end up carrying the day politically, effectively shutting off the spigot of new supplies and causing prices to firm.

Lastly, Hyland speculated that if large amounts of gas start getting exported out of the United States in liquefied natural gas tankers to places like Japan where gas is scarce and prices are high, supplies could tighten and prices could firm up.

What Hyland said is less likely to change much in the nearer term is a quick ramping up of demand related to things such as gas-powered automobiles. Those changes are probably inevitable, but they won’t happen quickly enough to become a reason, for example, another reverse split for UNG isn’t in the cards in the next year or two.

Fractional Shares

While the reverse split will not change the percentage interest each shareholder has in UNG, it could lead some investors to end up holding fractional shares of the fund if their pre-split units are not a multiple of four.

Since no ETF fractional shares can be traded on the NYSE Arca platform, the company said it will pay cash in lieu of the fractional units to investors.




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