With natural gas and coal stocks trading at 52-week lows, the market continues to ignore the very bullish natural gas weekly inventory reports. In fact, the reports are now mostly glazed over in the financial media.
For those that missed the report this week, the weekly inventories rose by 31 Bcf. While less than the 33 Bcf expected gain, the gain is actually significant as the inventory level over the last 5 years has typically risen by 39 Bcf. Normally this time of the year the inventories flat line and even gain during the transition season from the heavy usage in the winter to the heavy drilling in the summer.
As mentioned in the previous article on coal stocks, the amount of rigs drilling for natural gas is at historically low levels right at the time the numbers should be ramping up. Even worse, the desire to drill for natural gas is also compromised, as oil is more profitable at the current levels. This combination will ultimately lead to an increase in profits for the natural gas exploration stocks.
Historically low rigs drilling for natural gas
The weekly Baker Hughes Incorporated (NYSE:BHI) report showed last week that domestic rigs drilling for natural gas only gained 2 rigs to total 377. The amount of gas-directed rigs remains around the lowest since May 21, 1999. The total has plunged 76% from the all-time high of 1,606 reached in late summer 2008 and is done 247 rigs from the level last.
Top natural gas exploration stocks
Investors can use this data to go several directions from investing in oil service providers to drillers to exploration to coal miners. As mentioned in the other articles, the coal stocks have been the most devastated group, but the exploration stocks haven’t benefited at all from the growth in shale gas production as prices plummeted. In general, investors can probably invest in the group and make comparable returns. The most intriguing are the following:
Chesapeake Energy Corporation (NYSE:CHK) – the company is a leading natural gas producer with top acreage positions in most of the important shale areas. The recent removal of the founding CEO will bring discipline to the drilling budget. The excessive growth plan by the company was a large contributing factor to the over supply of the resource that developed last year.
Chesapeake Energy Corporation (NYSE:CHK) has a market cap of $12 billion and a revenue base of around $12 billion as well. The company has been in the process of selling assets in order to reduce the debt load. Now that natural gas prices are recovering these forced sells will now generate higher valuations.
Range Resources Corp. (NYSE:RRC) – the company has remained focused on developing the abundant natural gas resources in the Marcellus shale regardless of the prices for the commodity. Range has 1.6 million acres in the Appalachian region with another 811 thousand gross acres in the Southwestern region.
The company is a significantly smaller producer than Chesapeake Energy Corporation (NYSE:CHK), but due to a stronger focus and well-defined business plan the stock market has rewarded it with an equivalent market cap of nearly $12 billion. Range Resources Corp. (NYSE:RRC) only has a revenue base of $1.7 billion.
Southwestern Energy Company (NYSE:SWN) – the company has remained focused on developing natural gas acreage in the Fayetteville Shale area and has been rewarded with a $12.5 billion market cap with only $2.8 billion in revenue.
While the stock has crept upwards in the recent months, it remains below the upward $40 levels reached back in 2011.
WPX Energy Inc (NYSE:WPX) – as with a lot of other exploration and production companies, WPX has made a shift towards drilling for oil. The company though has had huge recent success in the Niobrara Shale with natural gas. In fact, the most recent exploratory well was a “major discovery” that initially produced 16 MMcf/d. The well was choked back and still produces almost 10 MMCf/d after the first 90 days. The company expects the well to produce in the 7 – 10 Bcf range. WPX expects the roughly 180 thousand acres in the Niobrara Shale play to more than double the 3P reserves from the current 18 Tcf.
The company has a market cap of only $3.3 billion with a revenue base of $3.1 billion. The stock has done virtually nothing since being spun off from Williams Companies, Inc. (NYSE:WMB) a few years back. At around $16, the stock trades in the middle of the range over that time period even with the recent drilling success.
Stock Performance
The stock performance of the sector has been horrendous over the last two years. The group has greatly underperformed the market with Chesapeake Energy Corporation (NYSE:CHK) down 31%. Range Resources Corp. (NYSE:RRC) had a decent 13% gain, but that too is only half that of the market.
Bottom line
The combination of natural gas inventories plunging to below average levels and decade lows in rigs directed at natural gas drilling sets up the perfect storm for a rebound in demand for natural gas exploration and production stocks.
The above natural gas stocks have vastly underperformed the market. While the stocks outside of Chesapeake don’t provide the same snap back potential as the coal stocks, each has the potential to generate solid gains over the next few years as pricing rebounds. Investors can probably generate higher returns in Chesapeake Energy Corporation (NYSE:CHK) with the huge leverage on the balance sheet, while a more conservative Southwestern Energy Company (NYSE:SWN) might produce smaller gains. Also, investing in Range Resources Corp. (NYSE:RRC) over WPX Energy suggests the Marcellus shale will outperform the Niobrara and Piceance Basin areas focused on by WPX.
Either way an investor chooses, the sector is likely to revert back to the mean as natural gas prices rise.
The article As Natural Gas Inventories Plunge, Investors Should Buy Exploration Stocks originally appeared on Fool.com.
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