The Three Nat Gas Companies at the Top of My Watch List

By Matthew DiLallo - May 30, 2012 | Tickers: CHK, RRC, REXX, SWN, UPL | 0 Comments

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The Three Nat Gas Companies at the Top of My Watch List

I’m beginning to build a watch list of companies that I am interested in adding to my paper trading portfolio.  Today I am adding three natural gas drillers to my watch list and I’ll look to add one of these companies to the portfolio in the near future.   I believe that natural gas will play a big role in our future and even though these companies all drill for the same commodity, not all will reward investors.

The three companies I’ll be watching over the next three months are Rex Energy (NASDAQ: REXX), Southwestern Energy (NYSE: SWN) and Ultra Petroleum (NYSE: UPL).  All three currently have a bulk of their production focused on dry gas but all are working toward shifting more of their production toward wet gas while they wait for prices to improve.   The following chart provides a good overview on each company:

Rex Energy is one of my favorite small natural gas producers in the industry.  Maybe it’s because I am a big fan of the scrappy little underdog but there is a lot to like about this company.  They have a great position in the Marcellus, a growing position in the liquids rich Utica and a solid hedging program.  Their recent deal to sell their 28% stake in Keystone Midstream will net them $120 million dollars.  They also have some assets in the Rockies up for sale, which should bring in some additional cash to be used in their drilling program.  My biggest concern is their liquidity going forward if gas prices go much lower, but these deals along with the upsizing of their credit facility give them the fuel needed to keep on drilling.

In Southwestern Energy we have an exceptionally low cost producer with a major position in the Fayetteville Shale play; in fact 87% of their current production is from this formation.  As a low cost producer they’ll benefit first from any real rise in gas prices.  One of the reasons they are able to keep their production costs so low is due to their Fayetteville Shale gas gathering systems which produces nearly $300 million in EBITDA for the company.  They are just beginning to diversify into some liquids areas such as the Brown Dense in Texas and a very large position in the New Brunswick of Canada, which if either pan out it will drive a lot of value for shareholders going forward. 

Finally, with Ultra we have another very low cost producer with an exceptional asset in Wyoming, an emerging Marcellus position and a potentially exciting liquids position in the Niobrara Formation.  They have among the lowest F&D costs in the industry at just $1.59/Mcfe with the potential for over 5,400 future wells as they are in the very early stages of their growth.  They have grown production 69% over the past three years and as they continue to drill their 20 years’ worth of inventory they will deliver exceptional returns to shareholders.  Like Southwestern, I’ll be watching their liquids potential as dry gas prices stay low, but if prices bounce, Ultra should bounce too.

While this isn’t a complete list of companies I am watching, it is the three that currently have my interest.  Two that just missed the cut Chesapeake Energy (NYSE: CHK) and Range Resources (NYSE: RRC) are both very interesting right now but are simply not as enticing as the three I previously mentioned.  Chesapeake for instance is between value and value trap at the moment.  The headlines of CEO Aubrey McClendon make me concerned if there is another shoe to drop.  He’s been less than honest with investors and seems to be the gambling type, especially when considering the debt ratio that is currently nearly one-to-one when compared to equity.  However, as the number two gas producer in the states they have enormous upside potential.  Range on the other hand has some great liquids rich plays as well as the balance sheet strength that Chesapeake lacks.  They just don’t have as low a cost base as Southwestern or Ultra.  They do have a much more diverse set of currently producing assets, but for now I’ll watch them from afar.

Energy in America is one of the most exciting investment theses of the next decade.  We have the resource potential and the American ingenuity to meet our economic needs in order to keep America great.  I’ll be looking to add one of these three companies to my “No Drip, No Mess Portfolio” in the coming weeks.   

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