The Best Way to Play Natural Gas Recovery

Piyush 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 have recovered nearly 85%, since the lows it created this year. Fears regarding the shortage in the storage capacities of gas, no longer hold ground. Also, the world is moving to natural gas as an alternative for coal. Additionally, the gas rig count is down 45% compared to the year ago quarter, which is expected to put an upward pressure on the price of gas. We believe that natural gas will continue its rally, and Cabot Oil and Gas (NYSE: COG) will be one of the biggest beneficiaries.

Cabot Oil and Gas is an oil and gas company which engages in exploration, development and marketing of oil, Natural gas and Natural Gas Liquids. In April this year, the company hit record production levels with 752 million cubic feet equivalents of natural gas per day. Cabot Oil and Gas has 154 operational gas producing wells, which together produce 354 billion cubic feet annually. The company has meager oil production levels, which is why natural gas prices largely dominate the company's financials.

Unlike its peers, the company is focused on increasing its natural gas production. In Q2 this year, natural gas production was 37% higher than the year ago quarter. Management is also looking to add two more rigs by the end of 2014. In order to make up for the expenses, the company sold its 35% non-operated working interest in 50,000 acres of land in Texas, to Osaka Gas for $250 million.

The world is concerned about global warming, and there is a rising need to replace toxic fuel sources. Nuclear energy production, does offer clean energy, but the risks posed by radiation fallouts are grave. Natural gas on the other hand produces 90 times less sulphur dioxide, and five times less nitrogen dioxide both compared to coal. According to Energy Information Administration, natural gas fired electricity generation will account for 80% of all the added electricity generation capacity by 2035.

In the recent quarterly financial results, a 10.4% jump in revenues compared to the year ago quarter was reported. The EPS stood at $0.17 which beat the market estimates of $0.07. Cash flows from operations increased by 23%, and overall the results were well received by the market.

The company shares its market space with Chesapeake Energy (NYSE: CHK), SM Energy Company (NYSE: SM) and Devon Energy (NYSE: DVN).

 

<img src="http://media.ycharts.com/charts/4e89fc446a0045340c11422cb621b95b.png" />

COG data by YCharts

The five year comparative stock performance of the four companies shows that Cabot Oil and Gas has outperformed its peers by a significant margin.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>Gross Profit Margin</p> </td> <td> <p>EPS growth expected next 5 yrs.</p> </td> </tr> <tr> <td> <p>Cabot Oil and Gas</p> </td> <td> <p>46%</p> </td> <td> <p>71.2%</p> </td> <td> <p>22.75%</p> </td> </tr> <tr> <td> <p>Devon Energy</p> </td> <td> <p>48%</p> </td> <td> <p>79.4%</p> </td> <td> <p>6.5%</p> </td> </tr> <tr> <td> <p>Chesapeake Energy</p> </td> <td> <p>82%</p> </td> <td> <p>85%</p> </td> <td> <p>7.8%</p> </td> </tr> <tr> <td> <p>SM Energy</p> </td> <td> <p>76%</p> </td> <td> <p>75.9%</p> </td> <td> <p>16.9%</p> </td> </tr> </tbody> </table>

 

All four companies enjoy a healthy gross profit margin, but it is the low debt to equity levels that highlight Cabot Oil and Gas. Analysts expect the EPS of COG to grow at the fastest pace with nearly 23% growth over the next 5 years.

We believe that the natural gas recovery is here to stay. Cabot's financial results have beaten the market estimates, its stock has outperformed its peers, and the fundamentals look good. The company is rapidly ramping up its production levels, and any upside in natural gas would benefit the company. It is due to these reasons that Cabot Oil and Gas has a Foolish Buy rating.


PiyushArora 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, short JAN 2014 $17.00 puts 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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