5 Natural Gas Plays You Don't Have to Dig Too Deep For

The commodity boom and how to profit from it. In some ways we can see a little Mr. Plainview in all of us, can’t we? Now we have computers to mine for our profits and Natural Gas [NG] could be the next big thing as it has been lagging the other commodities. I really like this recent article from Seeking Alpha, nicely conveying on a bar chart a one year price change of the major commodities.

What is of note when I look at it, is not how much some commodities have gained but how much the others have lagged. Nickel, zinc, aluminum and natural gas have been diverging from the other hot performers in this space and I do expect this divergence to converge which is already happening as we speak. Natural gas is cheap when compared to the others based on price and price appreciation (time to play catch up). Sometimes you don’t look for answers but you look for new questions to answer.

Here is a recent article on Seeking Alpha on the NG space itself and its bullish thoughts on the fundamental basis for NG going forward. Here are my favorite NG stocks to keep an eye on going forward:

XTO Energy
XTO has got some good quarterly revenue growth at 32.9%. On Feb. 12th, XTO reported earnings of $0.96 vs. consensus of $0.92 and revenues of $1.59 billion vs. consensus of $1.54 billion. It also reported acquiring more than 35 million cubic feet of natural gas per day to the company’s already growing production base for $1 billion. Cramer likes XTOas does Fast Money.

On February 14th, Stanford raised their target on XTO partly in order to reflect an upward revision in their estimate of the company’s 2008 production growth, to 20% from 16%. The firm believes the company deserves a valuation premium to peers due to its above average record and prospects. They moved their target from $54 to $67, maintaining a Buy.

XTO has good support here at $56.67 and $55.40 with recent highs at $59 as minor resistance.

Apache Corp. (APA)
APA announced earnings on Feb. 7th reporting a beat with Q4 EPS of $3.19 vs. consensus of $2.52 and Q4 revenues of $3.01 billion vs. consensus of $2.77 billion. On Feb. 8th, Jefferies said they believed the company’s exploration program could offer significant upside for investors in 2008 and raised their target to $102 from $80, reiterating their Buy. Cramer also likes APA. They have shown a 52% increase on quarterly revenue growth (YoY) and a 105% increase in EPS (YoY). Shares have been as high as $112.49 and with them sitting at $110, it looks like it'll soon move above that level.

Chesapeake Energy Corp. (CHK)
CHK announced earnings on Feb. 21st and they were steller. CHK reported Q4 adjusted EPS of 93c vs. consensus of 81c. CHK reports Q4 revenue $2.1B vs. consensus of $1.95B.

Deutche Bank raised CHK's target price to $57 following earnings and maintained their Buy rating. On Feb. 20th, Jefferies wrote that the company could post group-leading organic growth in production and reserves over the next several years and initiated CHK with a Buy and $54 price target.

Meanwhile, CRT Capital on Feb. 19th raised their target on CHK to reflect a modestly higher cash flow multiple. Techincally, CHK is breaking out like a banshee and is now creating a bull flag formation. They have consistently beaten analysts estimates and look to continue beating.

Here is another bullish article about CHK from a great Seeking Alpha contributor.

Southwestern Energy Co. (SWN)
SWN reports earnings on Thursday this week. FBR said they would buy shares ahead of the company release. They said that positive catalysts in the upcoming earnings report will permit the company to trade above their underlying NAV valuation. The firm raising their target price to $64 from $60. SWN has seen about 4 upgrades in the last 30 days. Their quarterly revenue growth is at 76% (YoY) and their quarterly earnings growth is at 52% (YoY).
Not bad. IBD wrote on Jan 28th,

"South West Energy rebounds to become a successful natural gas producer
The dark days for South West Energy (SWN) were the late 1990s and early 2000s when it lost a major law suit over a gas contract that put it heavily into debt. No more, according to Investor’s Business Daily’s “The New America”. “A lot of people thought we wouldn’t survive that period,” says CEO Harold Korell. But he knew that the way forward was to find new oil and gas reserves, and from the inside out. From 2003 to 2007, the company’s earnings grew at an average annual rate of 50%, revenue by 34%.

These days, the key is its involvement in the Fayetteville Shale play in Arkansas. “What’s got people excited about the company and the reason it’s done well is they basically took a flier on the Fayetteville Shale play,” says John Freeman at Raymond James & Associates, who thinks South West will get reserves of 2B to 2.5B cubic feet of natural gas for each well there. Last year that range was 1.3B to 1.5B. Freeman calls it a “game changer.”

In each of the last two quarters, earnings have jumped a minimum 47%, as revenue climbed about 75%. In the third quarter, earnings surged 50% from a year ago to 30 cents a share. Revenue was up 77% to $297.6M. Analysts estimate full-year earnings to climb 28% to $1.22 a share, and 35% in 2008.”

SWN is a steady climber technically while it looks to build a bull flag. SWN looks to stay in an uptrend channel although it has been bogged down by fundamental concerns of being overvalued. Biotechman says it is the most overvalued of the group with a 58 P/E, so earnings could be key for it this week. An argument could be made that the growth in the Fayetteville Shale play lends support for a higher P/E than its peers.

Ultra Petroleum Corp. (UPL)
UPL came out with earnings on Feb. 20th and they were again steller. UPL reported Q4 EPS of 70c vs. consensus of 32c. They also reported Q4 revenues $162M vs. consensus of $156.39M. Jefferies believes the company will likely raise 2008 production guidance as more pad rigs are put to work. They also raised their target from $80 to $88 and maintained their Buy rating. Cramer likes UPL too. UPL projects output to rise 18 to 22 percent and sees a $755 million capital outlay in 2008.

What that tells me is that they think NG prices are undervalued and are planning to boost production in order to meet future demand and capture higher prices. Otherwise more production would only depress prices if you don’t have that support of higher demand.

UPL is trading near its 52-week high of $78.91 and is also riding an upward channel consolidating a bullish flag pattern. A breakout on high volume would confirm a further upward move on all these bull flag formations, otherwise some consolidation is needed.

It is of interesting note that the share prices of these NG plays have outperformed the actual price of NG on a relative basis. That would be something to note and be watchful over as we progress through this year.

Disclosure: None

Comments

[Georealist]

Nice job on the "local" gas plays...will follow them and see how your research pans out..Without a doubt..nat gas is going to wake from its long neglect! Greg Pinelli..the GeoRealist

[optiondragon]

They were up quite a bit today and the article came out this weekend on my site.

[Rich Shinnick]

No drillers?

[Phil Obal]

Do you have an opinion on TELOZ (Nat Gas and Oil)? Paying a very nice dividend with very good upside potential.

[topax]

i too am interested in gas explorers and developers aside from Conoco - any suggestions?

[d_teller]

I had Teloz, until late 2004. The Western Gulf rigs that pay the "Telephone Offshore Royalty Trust" its income were shut down for hurricane related repairs, and just returned online this past year. Check out a 5 year chart of the TELOZ price, and you can see this. TELOZ stopped payinfg dividends for a while ...so watch the weather!.

[optiondragon]

Rich different article...what would be your suggestions?

Topax there are alot of them do you have any suggestions or best ones to watch?

[swimjames]

For most of the past three years, the fastest growth in the energy patch could be found offshore and overseas. Natural gas prices have been weak, and US and Canadian drilling activity is driven largely by gas, not oil. Therefore, companies with exposure to North American gas markets have vastly underperformed the broader energy indexes.
The list of underperformers includes contract drillers and services firms that serve producers in these markets. As gas prices topped out in late 2005, drilling activity moderated, which meant less demand for various sorts of equipment from drilling rigs to drill pipe. And, of course, exploration and production (E&P) stocks producing gas for sale in North America also experienced headwinds as their main product became less valuable.
But a key shift is now underway. North American natural gas prices are finally rising again; inventories of gas in storage are now approaching normal seasonal levels, and a colder-than-expected winter is driving demand.
And gas prices are even higher in Europe and Asia. That means that companies with the flexibility to ship gas in the form of liquefied natural gas (LNG) aren’t sending shipments to the US. In fact, according to the Energy Information Administration’s (EIA) data, US LNG imports in November--the latest month for which we have accurate data--fell to the lowest level since 2002. That’s further tightened supplies.
A rapidly improving environment for gas prices has reawakened a host of North American natural gas-levered firms; for the first time in three years, there’s more opportunity in these stocks than in the more internationally focused companies. The key to investing in North American energy stocks is simple: Focus on unconventional reserves.