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With the rebound in natural gas prices, the natural gas E&P sector is finally getting interest from investors. I forecast natural gas prices to be in the $4 to $5 range for 2013 and above $5 next year. The variables over the next few months will be summer heat and hurricanes. A hurricane won't affect natural gas prices as much as in the past because of all the onshore natural gas production, so I don't expect a spike in prices like we had with Hurricane Katrina. However, any shut-ins because of a hurricane will be supportive for natural gas prices. In light of the overall optimism for natural gas, I've identified 5 E&P companies that I like in the sector.

Chesapeake Energy Corporation (NYSE:CHK)

Dividend Yield: 1.90%

You really can't be invested in the future of natural gas without having a position in Chesapeake Energy. Chesapeake Energy is the second largest natural gas producer in the U.S. after Exxon Mobil (NYSE:XOM). I prefer Chesapeake over Exxon because it is more of a pure play on natural gas. Exxon is more diversified and I recommend Exxon to more conservative investors.

A big overhang for Chesapeake Energy stock has been the company's founder and former CEO Aubrey McClendon. Aubrey McClendon in many ways was a pioneering wildcatter that made Chesapeake what it is today, but at the same time caused many of its problems. The company became too leveraged under his watch and has been forced to dispose of assets to pay down debt. The company is now in a better position with Aubrey McClendon gone and can now focus on maximizing existing assets.

Chesapeake Energy has a current market cap of $12 billion. The stock trades with a forward P/E of 10.05 and the PEG ratio is 0.31. The company's current operating margin is 13.54%. On the balance sheet there's $291 million in cash to $12.85 billion in debt. Book value per share is $19.38.

The stock us up only 3.28% in the past year, so the stock performance has lagged the rally in natural gas prices. The company pays an annual dividend of 35 cents per share for a yield of 1.90%. In Chesapeake's case, I'd rather see them pay down debt versus a dividend.

Of the analysts that follow the stock, 7 have it rated as a Strong Buy, 4 a Buy and 21 a Hold. Price targets for the stock range from $19 to $36 with $22 being the median target. With Chesapeake trading below $19, I see upside potential in the stock.

Encana Corporation (NYSE:ECA)

Dividend Yield: 4.30%

Encana Corporation is a Canadian natural gas play. The company owns interests in the Cutbank Ridge in northern British Columbia; Bighorn in west central Alberta; Peace River Arch in northwest Alberta; Clearwater in southern Alberta; and Greater Sierra in northeast British Columbia, as well as emerging plays, such as the Duvernay in west central Alberta and Deep Panuke natural gas project offshore Nova Scotia. Encana also has properties in the U.S.

Encana has significant upside potential in my opinion as the Canadian government looks to become a major LNG exporter. Currently, 3 LNG facilities in British Columbia have already been approved to export LNG compared to just 1 in the U.S. As Canada races to export more of its gas, I see that as being beneficial to natural gas producers like Encana.

Encana Corporation has a current market cap of $13.77 billion. The stock trades with a forward P/E of 15.33 and a PEG ratio of 1.67. Overall margins are weak and the current operating margin is only 5.43%. On the balance sheet there's $3.18 billion cash to $7.74 billion in debt.

Over the past year, Encana has underperformed like Chesapeake rising only 5.12%. The company pays an annual dividend of 80 cents for a yield of 4.30%.

Of the analysts that follow the stock, 2 have it rated as a Buy, 18 a Hold, and 3 an Underperform. Price targets on the stock range from $17 to $28 with $20.75 being the median target.

Devon Energy Corporation (NYSE:DVN)

Dividend Yield: 1.70%

Devon Energy is the result of a series of acquisitions in the early 2000s. Its acquisitions or mergers included Santa Fe Snyder; Anderson Exploration in Canada; Mitchell Energy for its Barnett Shale properties in north Texas; Ocean Energy; and the Barnett Shale leasehold of Chief Oil & Gas giving the company a dominant position in north Texas. At the end of last year, Devon reported proven reserves of 2,963 million barrels of oil equivalent and operated 25,000 wells. The company also operates natural gas processing plants, natural gas gathering systems, and oil pipelines.

Devon Energy has a current market cap of $20.88 billion. The stock trades with a forward P/E of 10.48. Operating margins are 24.62%, but return on equity is -0.87%. On the balance sheet there's $7 billion in cash to $11.64 billion in debt. The stock is trading below the book value per share of $52.41.

It's been a rough year for Devon shareholders with the stock down 22%. The company pays an annual dividend of 88 cents per share for a yield of 1.70%.

Of the analysts that follow the stock, 8 have it rated as a Strong Buy, 9 a Buy and 12 a Hold. Price targets on the stock range from a low of $55 to a high of $90 with $70 being the median target. In my opinion, Devon Energy is a good buy and offers upside potential.

Southwestern Energy Company (NYSE:SWN)

Southwestern Energy is an independent natural gas company focused on the Fayetteville Shale in Arkansas and the Marcellus Shale in Pennsylvania. It also engages in exploration activities in the Lower Smackover Brown Dense formation in Arkansas and Louisiana; the Marmaton and Atoka formations in the Denver-Julesburg Basin in Colorado; the Bakken and Three Forks formations in Montana; and in New Brunswick, Canada. The company also operates natural gas gathering, marketing, and transportation activities in Arkansas, Texas and Pennsylvania.

Southwestern Energy has a current market cap of $12.38 billion. The stock trades with a forward P/E of 17.78. Operating margins are 30.36%, but the return on equity is a disappointing -20.19%. On the balance sheet there's only $53.58 million in cash to $1.67 billion in debt.

The stock has been an impressive performer the past year rising 26.54%. The company pays no dividend.

Of the analysts that follow the stock, 5 have it rated as a Strong Buy, 8 a Buy, 19 a Hold, and 2 an Underperform. Price targets for the stock range from $30 to $51 with $39.75 being the median target.

Range Resources Corporation (NYSE:RRC)

Dividend Yield: 0.20%

Range Resources is an independent natural gas, natural gas liquids, and oil producer in the U.S. Range Resources is best known for its pioneering development of the Marcellus Shale in southwestern Pennsylvania. In the Marcellus Shale, Range spent an average of less than $1000 per acre for its leaseholds. This compares to some companies which spent as high as $14,000 an acre.

Range Resources has a current market cap of $12.04 billion. The stock trades at forward P/E of 34.19. Operating margins are 11.40% and return on equity is 0.55%. On the balance sheet, there's only $252,000 in cash to $2.88 billion in debt.

The stock us up 30.10% in the past year. The company pays an annual dividend of 16 cents.

Of the analysts that follow the stock, 10 have it rated as a Strong Buy, 10 a Buy, and 17 a Hold. Price targets on the stock range from $60 to $96 with $84.50 being the median target.

Assessment

I think all 5 companies are worthy investments. Each company has been forced to become lower-cost producers and are primed for upside potential as natural gas prices rise. I think investors in the natural gas space will be well-rewarded over the next 5 to 10 years.

Source: 5 Natural Gas Stocks To Own