Natural Gas Stabilizes

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Standing in the check-out line at my local Target, I couldn't help but notice the friendly and chatty register worker who was tallying up our purchases. She called people by name upon swiping their respective credit cards and was not afraid to tell us a little bit about herself. You see, she had just driven by the local gas station across the street here in a small town in New Jersey - where incidentally gas prices benefit thanks to local refiners - and was dumbfounded by the sticker price.

Her name is Trixie, and she has put in a solid 15 years into this particular Target location beginning when the retailer's doors first opened here. Her shock came from a threatening sticker price of $3.99 per gallon plastered on a sign in mid-air as she devotedly made her way to her hourly job. "I'm just going to start riding my bike," she exclaimed, seemingly half joking if only to make a point. Point well taken, Trixie.

Unfortunately for Trixie and many other Americans, automobiles do not run on natural gas. Only one percent of the worldwide total of vehicles are powered by natural gas, according to Kathryn Clay, the executive director of the Drive Natural Gas Initiative, cited in The New York Times. It's a shame because natural gas prices are only a fraction of where crude oil - a key ingredient in producing fuel - trades.

For much of this year, natural gas prices were considered cheap. It was only months ago that natural gas fell to its lowest levels in a decade. Prices remain low relative to historical expectations but have climbed more than 6 percent in recent days to just under $3 per million British thermal units on the NYMEX, which represents the highest price in about a month. This is music to the ears of natural gas producers, which are seeing some buying activity in their stocks. Still, some of the most bullish predictions don't place natural gas prices above $4 Btu.

One reason for the surge is supplies are dropping to more reasonable levels. The shale boom has placed North America in a more powerful position for energy production but it has also skewed the supply/demand equation in favor of the end user. The tide may be turning, as natural gas inventories - while still historically high at 11% 2007 levels, according to The Wall Street Journal - remain significantly below where supply stood in the Spring.

While some of this improvement is due to Hurricane Isaac and its path that slowed down energy production, there are more encouraging trends emerging. Demand by gas-fired electricity surged this summer due to record temperatures. That demand will only be exacerbated as we head into the winter months. So much so that Teri Viswanath at BNP Paribas tells the WSJ that natural gas storage inventory surplus may be gone by the end of the year.

For some, the improving conditions for natural gas prices is too little too late. Chesapeake Energy (NYSE: CHK), once a high-flying stock on the acquisition trail, just shed nearly $7 billion in assets in some of the highest producing energy fields in Western Texas. It is selling the lion's share of its gas and oil assets in the Permian Basin as well energy infrastructure to Royal Dutch Shell and Chevron. The company is changing its identity from a previous leading position in natural gas to crude oil where profits are richer.

Chesapeake, with a market cap of about $13 billion, isn't done selling its assets either as it attempts to dig itself out of a debt hole and fund operations going forward. Unfortunately, this once high flier has been hurt by weak natural gas prices that were exacerbated by criminal investigations by the U.S. DOJ for certain competitive practices. Chesapeake Energy's fall from grace has forced the energy company to sell its assets in a fire-sale manner.

While Chesapeake climbs out of its partly self-made pit, other natural gas companies are poised to benefit from the expected rise in commodity prices. Devon Energy (NYSE: DVN), a leader in shale exploration which also has a presence in the Permian Basin, just announced its 4Q cash dividend. The stock is trading 19% below its 52 week high.

Companies with exposure to the resource-rich Marcellus Shale in Pennsylvania and West Virginia, including Cabot Oil and Gas Exploration (NYSE: COG) whose production in the drilling field recently reached record levels amid greater drilling efficiency, stand to benefit from the higher prices.

One of the compelling takeaways from higher energy production domestically is just that - we are accessing more of our own resources and developing these fields right at home. North America is after all the leader in natural gas. It may not do anything to remove the sticker shock that consumers like Trixie and so many other Americans are experiencing but it is another step forward for energy independence.

GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls 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.If you have questions about this post or the Fool’s blog network, click here for information.

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