New Life for These 3 Natural Gas Producers?
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Natural gas prices climbed recently and with them, the stock prices of natural gas producers. In fact, natural gas prices have been steadily climbing for months. Even better, the future foretells more natural gas consumption. As highlighted in the chart below, the US Energy Information Administration projects growing gas consumption by electric utilities. Growing exports to Mexico will further boost demand. In fact, three new natural gas pipelines between Mexico and the southwestern US are under consideration.
Couple this with the past trend of natural gas withdrawls exceeding production, gas producers could see brighter days ahead. Let’s look at three examples.
A Major Player That Needs Help
Chesapeake Energy (NYSE: CHK) boomed with the development of hydraulic fracturing for natural gas. Regrettably, the company expanded heavily through debt just as natural gas prices crumbled. As a result, Chesapeake stock declined from the mid $60’s in July of 2008 to less than $20 by the end of that same year. The company currently trades at around $22/sh.
Chesapeake recognized its debt problem and took steps to address it. Debt remains a concern as its current debt to capitalization ratio increased from 2011. Chesapeake also saw the need to balance its natural gas production with oil and liquids and responded. The company’s 2012 oil production grew 69% year over year and significantly contributed to its revenues. 2013 should bring additional oil and liquids production and revenue growth.
Natural gas remains a significant player in Chesapeake’s operations. Based on the company’s 2013 guidance, for every $0.10 natural gas prices rise, the company anticipates a $0.04/sh annual earnings increase. The combination of increasing oil/liquids production and natural gas prices may finally bring some light to the end of Chesapeake’s financial tunnel.
Production, transportation and consumption in one company
EQT Corporation (NYSE: EQT) handles all aspects of the natural gas business. Its major production operations in the Appalachian and Huron Basins are illustrated below.
EQT produced a company record of 258 Bcfe of natural gas in 2012. Great news until you discover that natural gas prices dropped 31% from the year before which resulted in a decline in revenue and earnings. However, EQT's production costs are some of the lowest in the industry and its reserves and production continue to rise. These factors should reverse the revenue decline.
EQT midstream operations, primarily through its 60% stake in EQM master limited partnership, provides natural gas transportation not only for EQT gas, but third party producers as well. Roughly 70% of EQM revenues come from EQT. Midstream revenues grew 11% last year and with expanded pipelines and pipeline acquisitions, should continue growing.
Lastly, EQT owns the regulated natural gas utility, Equitable Gas. EQT plans to sell this unit to People’s Gas for cash, midstream assets and a commercial agreement for EQT to continue supplying gas and related storage and transportation services to Equitable Gas.
Big producer with small production costs
Selling at 108 times earnings and climbing, Cabot Oil and Gas (NYSE: COG) presents a dilemma. The company produces natural gas from the Marcellus shale play and with its low production costs, makes money on it. Its oil operations in Texas in Oklahoma help earnings, too. In fact, Cabot’s latest earnings report exceeded analysts’ expectation by 20% despite the decline in natural gas prices. Cabot’s gas production grew by 43% and its oil production by 67% and cash flow by 30%. The company’s 2013 guidance forecasts increased production by 35-50%. Cabot is on a roll.
The dilemma? The company sells for 108 times earnings. Yes, you pay more for growth than for value, but … 108 times earnings? For a natural gas producer with oil/liquids on the side? True, the company claims to have historically low finding costs. True, revenues exceeded $1 billion this year for the first time in its history. True, Cabot plans $1 billion in capex for 2013 to bolster production, split roughly 2:1 between Marcellus gas and Texas/Oklahoma oil. If natural gas prices continue their slow rise, Cabot’s fortunes will grow with them. Still, 108 times earnings? Tough to justify that price in my little world.
Final Foolish Thoughts
The slow rise in natural gas prices breathes hope and revenue into natural gas producers. This past week alone, the NYMEX price for gas rose $0.15/mmBtu and as the chart below shows, all three companies mentioned above benefited. If the trend of higher gas prices continues, I see EQT benefiting investors the most. Cabot’s price reflects high expectations which could be tough to meet.
Chart courtesy of Motley Fool
Chesapeake looks undervalued by many metrics, but its debt and drama deter me from investing heavily. Rumors persist Chesapeake may be acquired, which for some is worth an investment. EQT, while not cheap at 54 times earnings, look best positioned regarding debt, growing production, reserves, and infrastructure. A bit of insider buying adds to my confidence.
Robert Zimmerman owns shares of Cabot Oil & Gas. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 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!