Explorers, Producers in Spotlight Thanks to Renewed Focus on Natural Gas

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 |  Includes: APA, APC, CHK, CVX, DVN, GMXRQ, RRC, SD, SWN, XOM
by: Investment Underground

By Jack Fuller

With energy debates raging following oil supply issues in the Middle East, the nuclear crisis in Japan, and a push toward natural gas at the White House, we thought it would be ideal to take a look at some of the leading natural gas explorers and producers in the United States. The following companies are all either primarily focused on natural gas exploration and production, or have recently ratcheted up focus in the area.

GMX Resources Inc. (GMXR): GMX Resources is an oil and natural gas production company based out of East Texas. With most of its drilling occurring in the Haynesville Shale, GMX’s 2008 reserves were 465 billion cubic feet, made up of 94% natural gas in both drilling and production. GMX recently added oil exploration in the Bakken formation in North Dakota and the Niobrara formation in Wyoming to diversify its holdings. (Which we think it got for a bargain.) Natural gas prices hit GMX hard at the end of 2010, causing a reported net loss of $149 million. Stock fell as low as $4.20 on February 15 of this year, but share prices have recovered a bit, hitting $6.35 on Monday. Weaker performance than expected in late March saw many analysts downgrade the stock, but its price has surged in the past week.

Range Resources Corporation (NYSE:RRC): Range Resources Corporation explores and produces natural gas in the U.S. RRC owns 2 million net acres across the U.S., including positions in the Permian Basin, Mid-Continent region, gas fields in southwestern Virginia, and 800,000 fairway acres in the Marcellus, one of the premier shale gas plays in North America. Like GMX, the biggest issue for Range in the future will be depressed gas prices. However, Range’s position in the Marcellus, which has superior conditions for drilling and close proximity to the Northeast, gives it an edge over many of its competitors. If there is movement in the U.S. toward natural gas, don’t be surprised to see Range rocket skyward. Range currently trades at $58.53. We estimate its fair value at $72.

Anadarko Petroleum Corp. (NYSE:APC): Anadarko acquired Kerr-McGee and Western Gas Resources in 2006 to diversify its portfolio beyond oil, and today is reaping the benefits. With 30.3 million net acres based in natural gas properties in the U.S. and deep-water oil and gas projects in the Gulf of Mexico and Africa, Anadarko has a diverse portfolio spread across the world. Although we are confident Anadarko can increase its production in the coming years, a PE Ratio of 54.4 above the industry average of 31.5 makes it less of a value than it once was. The stock currently trades at $82.79.

Chesapeake Energy Corporation (NYSE:CHK): The second largest natural gas producer after Exxon Mobile Corporation (NYSE:XOM) primarily explores and produces natural gas in the United States with positions in the Barnett, Eagle Ford, Haynesville and Marcellus shales. Chesapeake recently increased its focus on oil production because of slumping natural gas prices, aiming to produce 250,000 barrels a day by 2015 vs. the 30,000 a day it produced in 2009. Despite its increasing interest in oil, Chesapeake CEO Aubrey McClendon still believes natural gas is of high value and that the use of natural gas in transportation could cause changes in demand that will soak up supplies and drive up natural gas prices. Chesapeake’s aggressive financing moves to acquire high-value lands have set it up for future potential, but were still unsure about the sustainability of its business model. Chesapeake currently trades at $33.83 with a PE Ratio of 13.5.

Devon Energy Corporation (NYSE:DVN): Devon Energy has a good mix of growth-oriented oil and gas assets with natural gas making up 69% of production and 60% of reserves. That mix of oil and liquids has allowed it to weather the current gas over-supply. Devon boasts a strong balance sheet and technicals, but the $91.98 share price makes it a tough buy. Devon has an EP Ratio of 17.4 vs. an industry average of 31.5.

SandRidge Energy Inc. (NYSE:SD): SandRidge primarily operates in the 650,000 acres it holds in the West Texas Overthrust, with 85% of its production weighted toward natural gas. SandRidge’s stock price has risen nearly 72% year over year to $12.97 as of the close on April 4, and its PE Ratio of 24.9 is below the industry average of 31.3. However, it also carries more leverage than the average company in the industry, and investment needs mean SandRidge will require outside financing.

Apache Corporation (NYSE:APA): Apache is one of the largest independent exploration and production companies in the world with plays throughout North America, and oil and gas projects in Egypt, Australia, Argentina and the U.K. President Obama called natural gas’ potential as a vehicle fuel “enormous”, and Apache has already undertaken steps to push natural gas fuel. Apache announced that it would provide a compressed natural-gas fuel station at Houston’s George Bush Intercontinental Airport to serve the airport parking shuttle fleet. This move is likely just the first of many as Apache tries to expand the role of CNG-powered vehicles. Apache shares trade at $130.30 with a PE ratio of 15.4.

Southwestern Energy Company (NYSE:SWN): Like many natural gas producers, Southwestern Energy has been riding a high wave since the disaster in Japan. Southwestern’s stock has risen 19% since March 11 based on projections that Japan would be importing more liquefied natural gas, but recent reports reveal that Japan will likely replace its nuclear energy with liquefied natural gas from Qatar and Europe, not the United States. Featherstone also reports that Southwestern Energy is extremely exposed to weak natural gas prices, as it has hedged just 40% of 2011 volume compared to the gassy E&P average of 54%. SWN trades at $42.62 with a PE Ratio of 24.6. We recommend a hold on SWN.

Chevron Corporation (NYSE:CVX): The second largest oil company in the United States has exploration, production and refining operations worldwide, producing 2.7 million barrels of oil a day. At $108.23, Chevron is trading near its 52-week high ($109.65) with a PE Ratio of 11.4. Governments and national oil companies control many of the remaining oil resource pools, meaning Chevron has had to go to greater lengths (deepwater exploration) to acquire reserves. Chevron has growth opportunities in unconventional resources with the recent acquisition of Atlas, and ownership of refineries in Asia should offer access to growth markets. However, the lack of easily accessible oil and thin refining margins in the U.S remain a major concern.

Exxon Mobil Corporation (XOM): The world’s largest refiner, Exxon produced 2.4 million barrels of oil and 12.1 cubic feet of natural gas a day in 2009. Like Chevron, Exxon is finding it increasingly difficult to find cheap, easily accessible oil because of nations controlling oil reserves. Geopolitical risks such as militia attacks are also increasing as Exxon delves further into foreign territory. Despite the risks and increasing pressure, Exxon’s expertise with large projects and consistently higher returns on capital give it a competitive advantage over its peers and should allow it to successfully find new resources. Exxon trades at $84.87 with a PE Ratio of 13.6.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.