Jefferies bearish on U.S. natural gas stocks

By Ryan Vlastelica

NEW YORK, June 23 (Reuters) - Jefferies & Co on Tuesday recommended that investors reduce their exposure to natural gas companies, arguing that the market was overly optimistic about the potential for higher gas prices.

Despite certain expectations that suggest gas prices may rise, "cool temperatures and the potential for a slower than forecast economic recovery may cause natural gas prices to lag expectations currently priced into equities," the investment firm wrote.

Jefferies noted that several companies with sensitivity to natural gas prices had outperformed the Energy Select Sector SPDR ETF (XLE.P) by more than 50 percent over the past few months, listing CNX Gas Corp (CXG.N), XTO Energy (XTO.N), Diamond Offshore Drilling (DO.N) and Quicksilver Resources (KWK.N), among others. The brokerage advised hedging positions in such companies through the use of options.

"Since implied volatility looks cheap to fairly valued in the majority of the companies, hedging longs with puts or replacing stock with call options looks attractive," the broker wrote to clients.

Not all brokers were bearish on natural gas. On Monday, Jeffrey Saut, chief investment strategist at Raymond James & Associates, wrote that he had become "increasingly constructive" on natural gas because gas reserves generally deplete faster than oil, because there is no OPEC competition and because gas is "politically more favorable than coal."

Saut listed Apache (APA.N) and Occidental Petroleum (OXY.N) as companies in the sector he rates favorably.

(Reporting by Ryan Vlastelica; Editing by Kenneth Barry)