At Last, Natural Gas Stocks Bottom Out And Opportunity Knocks

by: Marc Courtenay

Sun Tzu says, " a log or stone rolls down a hill, good soldiers seek effectiveness from momentum." Dean Lundell, author of "Sun Tzu's Art of War for Traders and Investors".

As the late Etta James so melodically exclaimed in her hit song with the same title, "At Last"!, those of us who have "loved" the theme of investing in the natural gas and energy sector have endured for this moment. Yes, it appears that the best and biggest of the companies that directly or indirectly make their money producing, refining, and selling natural gas have bottomed out for the time being.

Shares of companies like Southwestern Energy (SWN), EOG Resources (NYSE:EOG) and Chesapeake Energy (NYSE:CHK) started the last trading week of January on a high note. SWN and CHK were the two biggest winners. Shares of Southwestern Energy moved dramatically higher on Monday after the stock was upgraded to "Outperform" by BMO Capital Markets, which said natural gas prices could rise temporarily before winter's end.

A number of other natural gas producers saw their shares rise as Apache Corp. (NYSE:APA) announced a $2.85 billion purchase of privately held Cordillera Energy Partners, and Chesapeake Energy Corp. said it would cut production by 8 percent.

Chesapeake produces about 9 percent of the nation's natural gas, and its announcement could signal a new strategy to reduce production to shore up the market price of natural gas. Strong production and mild weather this winter have led to a plethora of natural gas, sending the price of gas plummeting to a 10-year low last week.

After all this news, natural gas prices rose about 9% on Monday. Another beneficiary of this industry-wide news was Range Resources (NYSE:RRC) whose shares were up close to 9% during the day.

Another attractive natural-gas oriented stock is Dorchester Minerals L.P. (NASDAQ:DMLP) which engages in the acquisition, ownership, and administration of producing and non-producing natural gas and crude oil royalty, net profits, and leasehold interests in the United States. Dorchester Minerals pays a delicious 8% dividend and has experienced a considerable amount of "insider" buying over the past 6 months, this according to a recently published report.

With Southwestern's shares soaring almost 11% and CHK share's price climbing 7%, and all on at least double the normal daily volume, it appears that a "bottom" has been reached with many of these stocks and the market-movers are placing their bets.

The "end-game" for investors may include investments in the lesser known natural gas producers, especially those in Canada.

Some Canadian energy companies like Encana (NYSE:ECA), Enerplus Corp. (NYSE:ERF) which happens to pay a 9% dividend, Penngrowth Energy (NASDAQ:PCH) which also pays an 8% dividend, are moving higher. There are also some small, potential takeover-target companies like Advantage Oil & Gas (NYSE:AAV) and Provident Energy (PVX) which may also benefit hugely from both oil's spike and now natural gas' rally.

Other names that are potential beneficiaries of a reduction in natural gas supplies and an increase in pricing would include Linn Energy (LINE) which sports a 7.5% dividend yield, and the currently over-priced (in my opinion) Westport Innovations (WPRT).

By all means don't overact here, but use this as a "shopping list" to carefully choose which companies represent your best "bang-for-the-buck" and the most compelling valuations. If you can't decide which energy companies are best for your portfolio, you might choose two that specialize mainly in natural gas production like CHK and SWN.

Then consider adding an income-oriented natural gas partnership like Dorchester Minerals, and to top it off perhaps add an ETF like the iShares Dow Jones U.S. Energy (NYSEARCA:IYE) for diversity. But do your own "due diligence" with great carefulness.

Disclosure: I am long CHK, DMLP, ECA, AAV.