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Bullish on natural gas? That's so last year. After all, gas prices have come down by more than 75 per cent from the record highs of last year, thanks to a combination of higher inventory levels and lower demand. So that must be it, right? The gas price bubble is over, just like the dot-com bubble. Except for one thing: Demand for natural gas has a lot firmer foundation than the demand for dot-com stocks. Gas prices may have come down from their highs, but the long-term picture hasn't changed that much.

One sign of that came last week with Devon Energy's $5.3-billion takeover of Anderson Exploration. The purchase — which comes on top of Devon's takeover of gas producer Mitchell Energy for $3.1-billion (U.S.) a few weeks ago — makes the U.S. company the largest gas producer in North America, and is further confirmation that Canada's reserves are seen as strategically crucial by U.S. producers, not to mention by power generation companies such as Calpine, which bought gas producer Encal Energy in July.

To come to the conclusion that the natural gas story is over, you would have to argue that Devon Energy either doesn't have a clue what it is doing or that the financial wizards who structured the Anderson takeover were drunk. The U.S. producer paid $40 a share, a 52 per cent premium to the Calgary company's trading price, which like most other oil and gas stocks has been hit by a selloff over the past few months. And that $40 comes in cold, hard cash rather than stock — plus the company is assuming $1.8-billion worth of Anderson's debt. Not a cheap deal, even for Devon.

The deal looks even more expensive when you look at the value of the gas that Anderson has in the ground: Analysts said Devon is paying more than $6 per 1,000 cubic feet (mcf) of reserves — a fairly substantial premium to the recent price of $2.36 per mcf that gas recently fetched on the New York Mercantile Exchange. That spot price is close to a 21-month low, and less than a quarter of the record $10.10 per mcf that gas hit in late December. The only possible justification behind Devon's offer for Anderson reserves is that the company sees gas prices moving higher long term.

Many industry watchers describe what happened to natural gas last year as a "perfect storm," a result of several factors coming to a head: Demand for gas to run power plants in the United States had been increasing for some time, and the booming U.S. economy accelerated the impact — meanwhile, supply had not kept pace with demand in part because low oil prices in the late 1990s removed a crucial source of financing. All it took was a fairly cold winter to close the gap and send prices rocketing skyward.

Virtually all of those factors have since reversed themselves to one extent or another. Producers have been cranking up supply, thanks to the record cash flow that has been coming in from high oil and gas prices; those prices have led power companies to shut down many of their plants, since some of them have been pushed to the brink of bankruptcy — or over it, in the case of Pacific Gas & Electric's California subsidiary; and meanwhile, the U.S. economy went into the tank, which also helped to curb demand.

Unless you think the U.S. economy is going to stay where it is now for the rest of the decade, however, there's no reason to think the long-term bull case for gas prices has been derailed, only delayed. A.G. Edwards oil analyst Greg McMichael told Money magazine recently that energy consumption by U.S. industry fell by 20 per cent in the first half of 2001 before recovering slightly in July and August. "We still have an energy crisis," the analyst said. "It's just masked right now" by the economic downturn.

Gas-fired power is also a trend that is not going away anytime soon: More than 7,000 megawatts of gas-powered generation came on-line in the U.S. in 1999, almost three times as much last year, and more than 50,000 megawatts is planned for this year. Some of that may be delayed, but the overall trend remains. But aren't there huge gas plays coming on-stream that will more than make up for any recovery in demand? After all, there's the massive Sable Island project, PanCanadian's Deep Panuke find on the East Coast, Ladyfern in B.C., plus all the natural gas in the far north.

But Sable Island and plays such as Ladyfern and Panuke, analysts say, will only just manage to keep up with demand — since most of the existing plays in Western Canada are getting long in the tooth and are therefore producing less and less. Gas from the far north will require a multibillion-dollar pipeline that could take years to construct, and that's if the various political and corporate players can even agree on which route to take. Forecasters expect demand from the power industry alone will grow by 6.5 per cent a year, while supply is growing by 2 per cent a year.

Maybe Devon Energy does know what it's doing after all.

E-mail Mathew Ingram at mingram@globeandmail.com

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