Global demand for energy is expected to grow in the coming years, especially considering the growing appetites of China and India. With the inability of oil to provide a stable and cheap supply, serious attention is now being given to alternative fuels to fill the gap. Natural gas is a natural candidate and a boom in consumption is anticipated. In this article I will explore how five companies are dealing with the production and distribution of natural gas, and whether or not investors can profit from their current position in the market. I chose these five players because they are heavily rooted in natural gas production.
Chesapeake Energy Corporation (CHK): Shares are trading around $22 at the time of writing, as against its 52-week trading range of $20.41 to $35.95. At the current market price, the company is capitalized at $14.8 billion. Its earnings per share during the last year were $1.81, and it paid a dividend of $0.09 (a yield of around 1.60%).
Chesapeake is the second-largest U.S. natural gas producer after Exxon Mobil Corp. (XOM). Chesapeake performed well last year despite persistently low natural gas prices. Its gross margin of 71.01% is the highest among the five natural gas producers reviewed in this article. Its net margin of 18.94% is still respectable even if considered average among natural gas producers. Chesapeake plans to raise some $10 billion to $12 billion to fund its 2012 capital expenditures, much of it through sale of assets, which on the side would address liquidity and debt issues. My recommendation for Chesapeake is buy because of a combination of little things, its relatively low price-to-earnings ratio of 12.22, its good track record, the prospect of a rise in natural gas prices, and the good potential of its planned capital expenditure.
Devon Energy Corporation (DVN): Shares are trading around $66 at the time of writing, as against its 52-week trading range of $50.74 to $93.56. At the current market price, the company is capitalized at $26.75 billion. Its earnings per share during the last year were $5.08, and it paid a dividend of $0.17 (a yield of around 1.05%).
Devon Energy Corp. is an independent energy company, which is engaged primarily in exploration, development and production of natural gas and oil. Devon has a good track record. Its operating performance compares favorably with competitors with a gross margin of 49.01% and net margin of 23.47%. Its price is reasonable with a price-to-earnings ratio of 12.73. It has good financial flexibility with its relatively low debt to equity of 29%. In addition, with the favorable sale of 1/3 of its interests in five of its shale oil and gas fields to Chinese petrochemical company, Sinopec, Devon gains important cash flows to fund its expansion plans. Devon is a buy because of its financial poise for growth, reasonable price, and good performance.
Southwestern Energy Company (SWN): Shares are trading around $34 at the time of writing, against their 52-week trading range of $28.37 to $49.25. At the current market price, this implies that the company is capitalized at $11.67 billion. Earnings per share for the last year were $1.80. It paid no recent dividend.
Southwestern Energy Company engages in natural gas and crude oil exploration, development and production within North America. It also focuses on creating and capturing additional value through natural gas gathering and marketing businesses. Southwestern rebounded last year with a return on equity of 22.81% from a loss the previous year. It also posted excellent operating results with gross margin of 53.98% and net margin of 23.14%. Its price-to-earnings ratio of 18.95 appears pricier than Chesapeake or Devon, but most of the difference is offset by stronger revenue growth of about 5% per year, including the latest year at 36%. Its debt-to-equity ratio of 84% still leaves some room for expansion. Its stock is recommended for growth and good performance.
Sandridge Energy Inc. (SD): Shares are trading around $7.69 at the time of writing, against their 52-week trading range of $4.55 to $13.34. At the current market price, this implies that the company is capitalized at $3.13 billion. It posted a loss last year.
SandRidge Energy, Inc. explores and produces oil and natural gas. It engages in exploration and production activities in shallow, conventional, domestic on-shore oil basins primarily in the Permian Basin and the Mid-Continent region, including northern Oklahoma, and southern Kansas. It's relatively small with market capitalization of $3.13 compared with competitors with at least $10 billion, Chesapeake, Devon or Southwestern. But it has the lowest gross margin of 27.39% among gas producers reviewed in this article. Sandridge also posted losses in two of the last five years. Sandridge is not a recommended buy because of unstable operating performance and high debt-to-equity ratio of 189%, which could limit growth opportunities.
Kodiak Oil & Gas Corp (KOG): Shares are trading around $9 at the time of writing, against their 52-week trading range of $3.59 to $10.41. At the current market price, this implies that the company is capitalized at $2.31 billion. It posted a loss last year.
Kodiak Oil & Gas Corp. is an independent energy company focused on the exploration, exploitation, acquisition and production of natural gas and crude oil in the United States. The smallest among those natural gas producers reviewed in this article with a market capitalization of $2.31 billion, Kodiak posted straight losses for the last five years. Kodiak's greatest disadvantage is that it has still undeveloped operations. Its price-to-sales ratio is 35 compared with competitors' less than 5. It will be years before Kodiak begins to cash in on its assets. I don't recommend speculating on Kodiak. Sell the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.