Commodity price may be hurting but that doesn't mean natural gas companies are bad investments
Natural gas companies are hurting - there's no doubt about it. But that doesn't mean natural gas companies are bad investments.
In fact, some of these companies are currently on the bargain rack. You just have to know where to look.
Take EOG Resources Inc. (NYSE: EOG, Stock Forum), for instance.
Traditionally known as a natural gas producer, EOG has reinvented itself as a major oil producer.
It's still heavily involved in the natural gas market, but the company also has managed to increase its total liquid oil production by 49% to 130,000 barrels per day.
Chief Executive Officer Mark G. Papa said he expects to reach 200,000 barrels per day this year. That would make EOG the second- or third-largest oil producer in the United States.
The effects of this transformation are evident in the company's earnings.
After taking a third-quarter loss of $70.9 million in 2010, EOG reported net income of $541 million for the third quarter of 2011.
That's not all. EOG's potential for growth is outstanding, since it has huge oil shale reserves. The company is the largest oil producer in both North Dakota's Bakken Shale and the Eagle Ford Shale in South Texas.
These two shale oil fields have played a key role in ramping up U.S. oil production over the past few years. They each have an estimated four billion barrels of recoverable reserves.
Earlier this month, analysts from Goldman Sachs Group Inc. (NYSE: GS, Stock Forum) raised their EOG share price target to $118, while RBC Capital Markets analysts set their target at $119. Those targets estimates represent a 13% to 14% premium from yesterday's (Tuesday's) closing price of $104.55.
And that's just one natural gas company with a strong investment pedigree.
Here are three others...
Going long: Three more natural gas companies to consider
Chesapeake Energy Corp. (NYSE: CHK, Stock Forum): Chesapeake is the second-largest natural gas producer in the United States. It's also the most active new-well driller in the country and the No. 1 horizontal-well driller in the world.
However, Chesapeake's greatest attribute is its robust portfolio of shale properties. In addition to bolstering reserves, these shale properties are attracting huge amounts of foreign investment.
French oil major Total S.A. (NYSE ADR: TOT, Stock Forum) said earlier this month it would pay $2.03 billion in cash and drilling costs for a 25% stake in Chesapeake's Utica Shale operation in eastern Ohio.
The money will help reduce Chesapeake's debt. Debt net of cash at year-end 2011 was $10.2 billion - $1.4 billion less than on Sept. 30 and $2.2 billion less than a year earlier. Debt will fall to $9.5 billion by year-end 2012 regardless of the price of gas, Chesapeake says.
That will give the company more money to fund expansion projects and make it an even more attractive takeover target.
Analysts at Brean Murray Carret & Co. have a $43.00 price target on the stock, which closed yesterday at $22.49.
Devon Energy Corp. (NYSE: DVN, Stock Forum): Like Chesapeake, Devon Energy has a strong portfolio of shale oil and gas fields attracting international interest.
In fact, China Petroleum & Chemical Corp. (NYSE ADR: SNP, Stock Forum), Sinopec, said earlier this month it would pay $2.2 billion for one-third of Devon's interest in five developing shale fields.
The company recently suffered a setback, however, when President Barack Obama rejected the Keystone XL oil pipeline project. Still, it's widely believed that the pipeline project will be revived, and eventually bring 700,000 barrels of oil per day from Canada.
Devon, which is based in Oklahoma City, is one of the largest active producers in Canada's oil sands and would profit directly from the pipeline's construction.
Interestingly, over the past month, Devon has had more analyst upgrades than any other large-cap company. It was upgraded by four brokerages and analysts in the past four weeks and currently is rated positively by 25 of the 33 analysts covering the company.
Anadarko Petroleum Corp. (NYSE: APC, Stock Forum): Anadarko has long been a big player in U.S. onshore oil and gas production, and now it's about to get even bigger.
The company recently re-evaluated the Wattenberg shale in northeast Colorado and now believes it holds between 500 million and 1.5 billion barrels of oil and natural gas.
A billion-barrel field is a rare find - only a handful have been discovered in the United States - and this new discovery could increase Anadarko's annual production rate in the region by 20% in 2012.
Based on 11 test wells, Anadarko is confident it can drill between 1,200 and 2,700 wells over time, and will ramp up Wattenberg's development by drilling 160 wells in 2012.
And these wells will have a quick payback rate.
A great example of this is its Dolph 27-1 well in the middle of the Wattenberg field. Anadarko has a 100% working and net revenue interest in the well, so it funds all operations and collects all the revenue. The well has 600,000 barrels of estimated ultimate recovery (the amount of oil and gas potentially recoverable from the well).
That gives the well about $15 million in net present value before taxes based on an oil price of about $90/barrel.
Tudor, Pickering, Holt & Co. recently named the company "King of the Rockies" and raised its net-asset-value estimate for Anadarko by 5% per share. And Goldman Sachs has a "buy" rating on the stock.
Additionally, John Paulson - the fund manager that made millions shorting the markets before the 2007-08 crash - had nearly $900 million in Anadarko at the end of September.
EOG, Chesapeake, Devon and Anadarko are all examples of natural gas companies with strong profit prospects at a time when natural gas prices have almost nowhere to go but up.
