Shares of PAA Natural Gas Storage (NYSE: PNG) hit a 52-week high today. Let's look at how it got here and whether clear skies are ahead.

How it got here
Founded in 2010 as a limited partnership of Plains All American Pipeline (NYSE: PAA), PNG provides gas storage facilities in Louisiana, Mississippi, and Michigan for a wide range of customers including utilities, pipelines, and producers. The stock has grown steadily with the market rise since the beginning of June as both the S&P 500 and natural gas prices have bounced back.

PNG Chart

PNG data by YCharts

As a commodity business in natural gas storage, PNG is a safer way to play natural gas as there is limited storage space in North America and as capacity begins run out, storage facilities should be able to charge more for their services. Gas storage levels are still running 9% higher from where they were a year ago, but after an abnormally hot summer storage levels have reentered the five-year range as the chart below shows.

Notice how gas prices bottomed out in the spring when the difference between the red line, which represents actual storage levels, and the gray five-year range was greatest. That's because during last year's warm winter consumption levels of natural gas were far below the norm, and investors thought that supply from this year's injection season would exhaust capacity, sending natural gas prices plummeting. However, the hot summer forced high levels of air conditioning usage, and with the heating season just a month or two away and levels in the normal range, capacity concerns have mostly disappeared.

What's next?
No one can say for sure where gas prices are headed, which are the main determinant of PNG's price, so predicting the future of the stock is more difficult than with most companies. But most investors have bought into PNG for the healthy 7.1% dividend yield, so any share appreciation is just an added bonus. Considering shares traded in the $20 range for much of 2011 and 2010, they could move higher if natural gas prices continue to increase. At a forward P/E of 19, PNG might seem expensive, but it's still cheaper than the only other pure play in the industry, Niska Gas Storage (NYSE: NKA), and PNG has topped estimates in each of the last four quarters. When the company reports earnings on November 4, investors will want to keep an eye on free cash flow, which has been negative in some recent quarters; long-term debt, which has continued to grow; and cash on hand, which has been under $1 million for the last few quarters. Majority owner Plains All American Pipeline's balance sheet looks similarly week. I'd like to see those numbers improve before I got invested with PNG.

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