The one natural gas producer that I can endorse without much reservation is Cabot Oil & Gas Corporation (NYSE:COG). Its first quarter earnings came to $52.4 million, or $0.26 per share, versus expectations of $0.24 for the quarter and $0.14 per share a year ago. Revenues came to $373 million, up from $272 million a year ago, based upon a 50% increase in natural gas production from the year earlier quarter. As the second quarter unfolds, Cabot Oil & Gas Corporation (NYSE:COG)’s numbers will look even better due to a greatly improved price climate for gas versus the second quarter of 2012. In all, I look for the company to double its profit from 2012, to about $1.30 per share for all of 2013.
My slight hesitation here has to do with valuation. At that $1.30 per share number, Cabot Oil & Gas Corporation (NYSE:COG) is trading with a price to earnings ratio of nearly 40. But if, like me, you see future increases in natural gas prices, Cabot Oil & Gas Corporation (NYSE:COG) is set to develop top tier top and bottom line performance in the year ahead. Its PEG is a modest 1.31, and I like this company a lot over the next one to three years.
Elsewhere in the natural gas world, things are far more bleak. Once proud EnCana Corporation (USA) (NYSE:ECA) is burdened by having overspent for property and equipment prior to natural gas’ price plunge. Having to write off a portion of those investments of $431 million in the first quarter of this year led to a GAAP loss for the quarter. But even omitting that largely non-cash charge from the equation, EnCana Corporation (USA) (NYSE:ECA)’s earnings in the first quarter came to $179 million, or $0.24 per share, compared to $240 million, or $0.33 per share a year ago. Despite the vastly improved price profile for natural gas this year versus last, EnCana Corporation (USA) (NYSE:ECA)’s fixed costs will doom it to a year where its profits are unlikely to approach last year. I would absolutely avoid EnCana Corporation (USA) (NYSE:ECA).
Similarly, shares of Southwestern Energy Company (NYSE:SWN) are unlikely to anytime see the $50 plus level it traded at in 2008. One problem with this company is that its earnings were not all that bad last year. Therefore, there seems to not be as much room for improvement in 2013 and 2014 as we find in other natural gas plays. Southwestern Energy Company (NYSE:SWN) cleaned up its asset base by taking $1.2 billion write-offs in 2012. All through the year, though, its underlying business performed well in the low price environment, as adjusted profits were $485 million, or $1.39 per share, down from $1.82 in 2011. The company will not release earnings for the first quarter until early May, and I look for quarterly earnings up 12% to 15% for both the quarter and full year 2013, on an adjusted earnings basis. There are more rewarding prospects elsewhere.
The article Natural Gas – An Industry in Peril? originally appeared on Fool.com and is written by Bill Edson.
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