Editor's Choice

You Could See Massive Gains or You Could Lose Your Shirt: You Choose

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

A lot of money will be made and lost with the natural gas swings this winter.

As of last Wednesday, the US natural gas price rally that started in May 2012 began to rapidly decline. Naturally, this hurt natural gas producers.

According to the U.S. Energy Information Administration, prices fell from a peak of $3.90 per million BTUs in November to only $3.11 BTUs last Wednesday. However, recent weather forecasts calling for a colder than anticipated season are driving up prices. Since the low last Wednesday, natural gas prices have climbed 11%.

Last week, the gas producers were squirming. Now, they may crack a smirk.

Chesapeake is Still at Risk

Since reaching a three month high in October, Chesapeake Energy’s (NYSE: CHK) stock price plummeted 23.5% through last Wednesday. As the nation’s second largest producer of natural gas, Chesapeake is vulnerable to environmental, political, and economic conditions. And, the warm weather was one reason for Chesapeake’s stock holders to be quaking in their seats.

Chesapeake expected natural gas prices to rise this winter season. As of the end of October and the latest investor and news reports, the company still had not hedged itself against the falling natural gas prices for 2013. As a result, investors are extremely vulnerable because Chesapeake is more correlated with the spot price of natural gas.

Regardless of the potential negative circumstances, Chesapeake will bounce back. However, I would not expect the stock to quickly recover if the natural gas price stays low.

But, Chesapeake’s stock has increased 3.8% since close last Thursday. The rise in stock price clearly coincides with the increase in the natural gas price. Therefore, investors’ profits could rise and ride along with the natural gas price. Also, increasing natural gas prices lead to more earnings to pay Chesapeake’s 2.1% dividend and to pay down debt.

Industry Comparison

Smaller companies like Ultra Petroleum (NYSE: UPL) are also heavily exposed, while mid-sized producers like Range Resources (NYSE: RRC) and Southwestern Energy Company (NYSE: SWN) could also take a hit if natural gas prices fall or stay low. Investors should even look at how a lower natural gas price would affect large producers like global giant Exxon Mobile (NYSE: XOM), the largest natural gas producer in the U.S.

<table> <tbody> <tr> <td> </td> <td>Market Cap</td> <td>Cash</td> <td>Current Liabilities</td> <td>Dividend</td> </tr> <tr> <td>Chesapeake</td> <td>11.2B</td> <td>298,000</td> <td>6,456,000</td> <td>2.10%</td> </tr> <tr> <td>Ultra Petroleum</td> <td>2.9B</td> <td>59,315</td> <td>469,057</td> <td>0%</td> </tr> <tr> <td>Southwestern Energy</td> <td>11.59B</td> <td>145,634</td> <td>761,165</td> <td>0%</td> </tr> <tr> <td>Exxon </td> <td>408.2B</td> <td>13,261,000</td> <td>70,061,000</td> <td>2.50%</td> </tr> <tr> <td>Range Resources</td> <td>10.49B</td> <td>151</td> <td>545,744</td> <td>0.20%</td> </tr> <tr> <td colspan="5">*Data in thousands. From Yahoo! Finance-most recent quarter</td> </tr> </tbody> </table>

Currently, Southwestern Energy Co. is trading at $33.16/share, a 9.4% drop since reaching a year high in November. With a support level of about $30.60, some analysts may not anticipate the support threshold being crossed. However, I suspect that if natural gas prices stabilize at their current price or continue to decrease, Southwestern Energy’s stock price will continue to fall. Southwestern Energy’s Exploration and Production division is active within the Marcellus Shale in Pennsylvania and the Fayetteville Shale in Arkansas.

<img src="http://media.ycharts.com/charts/cc0e5a13b9c602010cb9b558a6af0a79.png" />

CHK data by YCharts

A similar outcome could be expected for Ultra Petroleum, which is currently trading at $19.02, above its well established support level of about $17.75. Even with a Beta near or under 1, a drop in natural gas prices would hurt Ultra Petroleum. Like Chesapeake, the company did not hedge against natural gas production in 2013. Given the current external factors, I would like to think that Ultra Petroleum’s executives have or are working to hedge against the great risk they could encounter by the end of the winter season. Regardless, beware.

Also, investors should keep a sharp eye on Range and Exxon. Range’s hedged positions and role as the pioneer of Marcellus Shale drilling could help the company endure the natural gas price decline. And, if natural gas prices continue to increase, Range can quickly ramp up production to meet demand.

Furthermore, Exxon has projected that 80% of all North American gas supplies in 2040 will be from unconventional resources (like shale). As a result, the company is expanding its presence in the US and in unconventional natural gas, like shale. However, because of Exxon’s global position and size, the company has the cash flow to weather an energy downturn.

Conclusion

Energy brings massive gains. But, you can also lose your shirt. Unhedged firms like Chesapeake are more correlated to the price of natural gas. Play them for the upside. If you like energy but are risk averse, Exxon and Range are for you.


marascobn1 has no position in any stocks mentioned. The Motley Fool recommends Range Resources and Ultra Petroleum. The Motley Fool owns shares of ExxonMobil and Ultra Petroleum and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, Long Jan 2014 $50 Calls on Ultra Petroleum, and Short Jan 2014 $20 Puts on Ultra Petroleum. 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!

blog comments powered by Disqus