3 Ways to Play the Shale Boom

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

Natural gas shale has been discovered left and right in the United States, making us a worldwide leader in production. This has provided oil and gas companies with plenty of opportunities to get their hands on as much as possible. There are several ways to play this shale boom, with the exploration and production companies, suppliers of products used in the drilling, or the pipelines used to transport the gas. Let's take a look at three of the players in this sector.

The Producer

Southwestern Energy (NYSE: SWN) is a North American company focussed on exploration, development, and production of natural gas and oil. They currently operate in 7 major areas and have the potential to become the top natural gas producer in the United States.

The Fayetteville Shale contains their largest land holding, but they also have large holdings in the Marcellus Shale, Arkoma Basin, Brown Dense, Denver-Julesberg Basin, Overton Field, and rights to search for oil and gas in New Brunswick. In all of these areas, Southwestern has over 4,700 gross producing wells. 

The stock has been on the rise, gaining over 12.75% year-to-date. Here are some of the highlights from their fourth quarter 2012 earnings report released in February:

  • Earnings per share of $0.44, meeting analyst expectations
  • Oil and gas production increased 12% year-over-year
  • Operating income from midstream services increased 14.9%
  • Gas sales increased 4% 
  • Oil sales increased 37.2%

Earnings per share for the year decreased by 23.6%, but will be on the rise over the next 3 years. Analysts project earnings to reach $2.24 in 2015, representing a 61.2% growth from 2012.

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If natural gas prices are to rise, Southwestern could have more explosive earnings growth than the 61.2% expected. I think this will happen and propel the stock much higher. Southwestern Energy is a long-term investment worth making.

The Supplier

Hi-Crush Partners (NYSE: HCLP) is a leading producer of premium monocrystalline sand, which is a specialized mineral used as a "proppant" in hydraulic fracturing. Hydraulic fracturing, or "fracking," is a process in which shale rock is drilled and injected with fluids at a high pressure to release natural gas located in the rock. The proppant enhances the recovery of hydrocarbons from oil and gas wells, making a more efficient process.

A huge positive for Hi-Crush is their rail infrastructure. They have a location with full access to Union Pacific's mainline, which are able to reach all major shale basins in the United States. The ability to produce at low costs and ship directly to the customer on-site sets Hi-Crush apart from their competition.

They reported fourth quarter 2012 earnings on Jan. 31, which disappointed analysts, but was very positive overall. Here is a summary:

  • Earnings per share of $0.35 versus estimates of $0.47
  • Revenues increased 27.9% to $16.215 million
  • Gross profit increased 36.4% to $11.902 million
  • Net income increased 53.2% to $9.399 million
Management stated that, "increased drilling... combined with strong demand for premium proppants are all working in our long-term favor as we enter 2013." Over the next 3 years, earnings are expected to be on the rise.
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The most intriguing part of this stock is their 10.3% dividend. The dividend was doubled in January from $0.2375 per share to $0.475 and should continue rise since the company is a master limited partnership. Master limited partnerships, like real estate investment trusts, must pass on 90% of their income to investors.
I like where this company is heading and am looking to add a position if the stock falls another point or two.

The Transporter

Kinder Morgan Energy Partners (NYSE: KMP) is the largest natural gas pipeline and storage operator in the United States. The make money by charging companies to use their pipelines and are usually contracts over several years, meaning the constant fluctuation in commodity prices have no effect. 

Kinder Morgan has beaten earnings consistently over the years. Here are highlights from their fourth quarter 2012 report on Jan. 16:

  • Earnings per share came in at $0.75 versus estimates of $0.68
  • Revenues increased 59% year-over-year to $3.079 billion
  • Total revenues for the year rose to $9.973 billion compared to $7.943 billion in 2011

Kinder Morgan's earnings are expected to rise consistently over the next 3 years. In 2013, analysts expect them to earn $2.57 per share, an 11.3% growth from 2012. Estimates for this company are often much too low, so do not be surprised when they beat these earnings by a large percent. 

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Kinder Morgan has a high dividend and strong track record of raising it. They currently yield 6% and have raised the dividend for 17 straight years. They are an MLP, like Hi-Crush, so the continued growth in earnings will make this yield rise higher. Kinder Morgan is one of the best stocks you could ever buy for your portfolio. 

The Foolish Bottom Line

The natural gas industry in the United States is raging on and owning shares in it would be a smart move for any investor. Kinder Morgan is my favorite play because of their consistent growth and management's strong track record of returning value to investors. All three of these companies have the potential to be long-term investments, so take a closer look and see if one of them fits your investment style.

Joseph Solitro has no position in any stocks mentioned. The Motley Fool owns shares of HI-CRUSH PARTNERS LP UNIT LTD PARTNER INTS. 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!

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