Last month I wrote an article, 5 Natural Gas Stocks To Own. A lot has transpired in the past month and I wanted to look at each one individually and see if there's been any fundamental changes. Natural gas (UNG) prices dipped briefly below $4 during this time, but have rebounded back above $4 over upcoming hot weather, Obama's support for LNG exports, and Halliburton's (HAL) deployment of a fleet of CNG vehicles. My outlook for natural gas prices remains the same. I see $4 to $5 for the rest of this year and a move above $5 if we get a cold winter.
Chesapeake Energy Corporation (CHK) $20.80
The biggest news out of the second-largest natural gas producer in the U.S. was that the company finally named a new CEO. Former Anadarko Petroleum (APC) Senior Vice President Robert "Doug" Lawler will become the new CEO on June 17. This appointment is universally praised because Lawler is an engineer who oversaw oil projects around the globe and is known for cutting costs.
Former CEO Aubrey McClendon assembled a great set of assets at Chesapeake, but sunk the company too far into debt doing so. The company needs a CEO that can get value from those assets and not give them away at fire-sale prices. Lawler will use his skills at managing projects to transform Chesapeake from a prospecting company to an energy producer.
The other big news for Chesapeake shareholders is that famed value investor Bruce Berkowitz took a 2% stake in the company in the first quarter. It was his largest new position. Berkowitz is known for his motto "ignore the crowd." His portfolio has a very low-turnover, so investors know he's in Chesapeake stock for the long-term.
These 2 developments are certainly positives for Chesapeake going forward and makes me like Chesapeake a little more. I was disappointed in my last article on Chesapeake - A Look At Chesapeake And Range Earnings: Why Are They Hedging Now? - in that the company in my opinion was getting too conservative by placing hedges on their natural gas production. I look forward to the next moves by Lawler as he assumes the CEO post.
Encana Corporation (ECA) $19.73
The news out of Encana over the last month focuses on the company' earnings call for the first quarter of this year. Some highlights include:
Encana increased liquids production by 48% and is set to achieve production targets of 50,000 to 60,000 barrels per day for 2013.
According to interim President & CEO Clayton Woitas, "Encana is first and foremost a natural gas company. While we cannot control the prices for natural gas, we can exert discipline on our costs, thereby increasing our margins without depending on a sustained natural gas price recovery."
Company looks to achieve cash flow this year of $2.3 billion to $2.5 billion based on $3.75 natural gas and $95 WTI.
Encana has $2.9 billion in cash and cash equivalents.
Company will divest $500 million to $1 billion of assets this year.
$5 billion in undrawn bank credit lines until 2015.
1.5 billion cubic feet per day of natural gas production hedged at $4.19 per Mcf.
The company's focus on the Peace River Arch and its Gordondale Montney oil program in northwestern Alberta is paying off well. Currently 2 rigs are active in this play and expectations are to drill a total of 20 wells from three-pad locations by year-end. At the end of the year, production is expected to be 13,000 to 15,000 barrels per day. In this play, the company has identified a total of 60 well locations, or an additional 40 wells after the 20 wells are drilled this year.
The U.S. division achieved natural gas production averaging 1.455 billion cubic feet per day.
The company continues its search for a new CEO and hopefully a new CEO will be in place by the end of June.
I like how Encana is progressing. Once a new CEO is chosen, that will help the company much like it helped Chesapeake with their chosen CEO.
Devon Energy Corporation (DVN) $59.86
Devon Energy is one of my favorite stocks in the natural gas space and I highlighted the company's improvements in Key Takeaways From Devon Energy's Earnings Report. The main highlight for Devon is that the company is considering spinning of its midstream assets into a MLP. If this happens, look for further stock price gains as value gets unlocked.
Devon has a great balance sheet with $6.5 billion in cash. The exploration and development budget this year is $1.5 billion. I could see Devon doing a stock buyback or increasing the dividend with its excess cash. The company currently pays an $0.88 per share dividend for a yield of 1.50%.
Devon has 29 rigs working in the Permian Basin. The company has 1.3 million net acres in this promising play. More wells will be coming online in the second half of the year boosting production. The Permian Basin has already delivered 23 percent year-over-year production growth for Devon in the U.S. Total production of oil, natural gas, and natural gas liquids came in 2,000 barrels above expectations at an average of 687,000 oil-equivalent barrels (BOE) per day in the first quarter.
Devon sees the next large-scale oil growth for the company in the Mississippian, where the company has 600,000 net acres. 24 wells were brought online in the first quarter and Devon now has 53 wells operating.
Overall I really like Devon's progress and think the company remains undervalued. Look for further gains ahead.
Southwestern Energy Company (SWN) $39.57
Southwestern Energy just hit a new 52-week high. The market has reacted positively to its expansion in the Marcellus Shale. Southwestern recently completed the acquisition of 162,000 net acres from Chesapeake Energy for only $93 million. Southwestern has prime natural gas acreage not only in the Marcellus Shale, but also in Northern Arkansas' Fayetteville Shale.
Most analysts agree that Southwestern got the better end of the deal in the transaction with Chesapeake. The roughly 162,000 net acres sold include currently producing wells, whose net production totals roughly 2 MMcf per day from 17 gross, or 1.2 net, wells, according to Southwestern Energy's CEO Steve Mueller. The key acreage is mainly located in Pennsylvania's Susquehanna, Wyoming, Tioga, and Sullivan counties.
The per-acre price came in at about $575 per acre. In 2011, acreage in the same area was fetching anywhere between $1,500 and $5,000 an acre. It appears that Southwestern got quite the bargain and that will benefit Southwestern in the years to come as natural gas prices rise and the company increases drilling activity.
Range Resources Corporation (RRC) $77.38
Range Resources delivered a disappointing earnings report for the first quarter. The company missed earnings per share by 7 cents. The stock sold off $6 after the disappointing report, but has bounced back with the overall market.
Range still is one of the best plays for the Marcellus Shale. According to the company's CEO Jeff Ventura:
We are blessed by having approximately 1 million net acres in the state of Pennsylvania, which includes a very significant position in the liquids-rich portion of the play. Our position is further differentiated by the fact in our area we have not only the Marcellus but we believe we have great stack pay potential in the Upper Devonian and Utica, plus where our play is located is also very important from a marketing point of view.
However, Range Resources really disappointed me as the company actually lost money as natural gas prices rose. In the first quarter Range lost $96.8 million on its hedges. Because of this I recommend investors sell Range Resources and I am removing it from my list of 5 Natural Gas Stocks To Own. I don't see any upcoming developments in the next several months for investors to hold or stay in the stock.
My 5 Natural Gas Stocks To Own is now down to 4. I'll research the market and look for a replacement for Range Resources. I think investors would be better served right now selling Range Resources and going into one of the other four. Chesapeake, Encana, Devon and Southwestern continue to look promising and have delivered positives in the past month since my last article.