The Biggest Natural Gas Producers are Set to Grow
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The natural gas market needs long term investors and far sighted companies. The fracking boom greatly increased production and brought down prices, but consumption has not increased at the same rate. The early development of the crude oil market in American showed how monopolistic energy companies are at times, the best way to bring growth and stability to a market. The fracking boom may have gotten ahead of itself, as competition has driven prices so low than many investments are now unprofitable when considering the lifetime cost of the well. Consolidation within the industry will help to stabilize prices and the amount of new production brought online. Effective oligopolization of the natural gas market will provide a stable environment in which America can grow its energy supply and bring it onshore. Long term investors should take increasing oligopolization as a green light to invest.
As of 3Q 2012 US Natural Gas Marketed Production data by YCharts
ExxonMobil (NYSE: XOM) is one of the largest players in the energy market and the largest producer of natural gas in the United States. Cheasapeake's latest presentation shows that XOM produces 3,712 mmcf/day of natural gas, which is slightly above CHK's 3,282 mmcf/day. In the past year XOM has increased their acreage with the purchase of the Canadian firm Celtic exploration, Denbury's Bakken shale assets, and the development of infrastructure in Alaska to help encourage development. XOM provides 13.3% of US natural gas production, while industry consolidation has given the top 5 producers 47.1% of total production. XOM is a large diversified energy company, but natural gas investors should not ignore the firm. With its large capital base and experienced management, the company is able to maintain an ROA of 13.2% and an ROI of 25.2%. Their current PE ratio of 9.3 and yield of 2.6% makes them a good stable investment for long term investors.
Chesapeake Energy (NYSE: CHK) is the second largest natural gas producer in the United States as of 3Q 2012. From Jan. 1 2010 to Nov. 2 2012, they have decreased their number of drilling rigs by 92%, which should help to provide some price pressure and boost prices to a more sustainable $5 per MMBTU. Recently, CHK was forced to sell some assets due to its cash crunch, but they still boast a reserves to production ratio of 13. With a market cap of $11.1 billion this company is far from being the next XOM, but it is slowly starting to get its house in order. Its total debt to equity ratio of 1.32 is still high, but the majority of the debt does not mature until 2017. CHK continues their conversion to liquid rich plays and crude oil production, which should help give the firm the stability and income it needs. This company has a large amount of risk, but as their balance sheet is fixed up CHK will become more attractive.
Anadarko Petroleum (NYSE: APC) produces 2,499 mmcf/day of natural gas, which makes them the third largest producer in the U.S with 8.9% of total production in 3Q 2012. Like CHK, APC is starting to diversify away from dry fields and instead focus on liquid rich plays. They have assets North America, Brazil, and Africa. Their total debt to equity ratio of .69 is not extremely high, but their ROA of 3.5% and ROI of 5.5% are low when compared to more diversified producers like XOM. APC is not a screaming buy, as they currently trade at a PE ratio of 20.6, but this growing company is a good firm to watch as they continue to build their asset base and diversify away from natural gas.
As the fourth largest natural gas producer in the U.S. in 3Q 2012, Devon Energy (NYSE: DVN) produces 2,067 mmcf/day. 29% of their current production is oil, 19% is NGLs, and 52% is natural gas. They operate a number of oil and liquids rich plays. Recently, they signed a joint venture with Sinopec and have been able to keep their total debt to equity ratio at .52. DVN continues to try and diversify away from being fully dependent on natural gas, but their EBIT margin of 15.3% and profit margin of 7.6% are still significantly lower than APC's EBIT margin of 24.7% and profit margin of 13.5%. DVN's ROI is also low at 5.5%, but as prices improve and more liquids rich plays are developed, DVN should continue to boost its bottom line. DVN is a smaller player with a market cap of of only $21 billion, but it is a good firm to watch as it continues to diversify and grow.
Conclusion
The volatile markets of the late 19th century and early 20th century help to produce monopolized energy markets. JP Morgan's standard oil brought stability and control to the market while paving the way for the future development of the U.S. energy market. In the modern time we are seeing the largest natural gas producers diversify away from dry plays while trying to increase their market share. This process of oligopolization is negative for competition, but it will help to bring price stability, which is a long term positive for investors. XOM is a very strong company with a strong degree of control over their markets, which helps to maintain margins and profits for investors.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
