I was worried about rising natural gas prices for companies that make products with the intentions of unseating oil’s dominant position, but the flip side of that is the benefit to the suppliers.
One of the great things about investing is that a problem in one place can mean an opportunity in another. The companies could only go for the easiest, also known as cheapest, gas available. If the natural-gas price trend continues upward, it can finally lead some stocks much higher.
The extended environment of low prices has meant that these companies have had to operate in a lean fashion, squeezing out savings in costs whenever possible. Natural gas companies have to be far more judicious in their spending, and that experience could work to their benefit in a better price environment.
Hard-luck giant
I have a tendency to like down-and-out companies the best. Even ones that are pretty far gone get my attention. I like to look at them, though I do not uniformly see the good in them–but the potential is enticing.
Chesapeake Energy Corporation (NYSE:CHK) has a new CEO, and one really terrible quarter in 2012 that makes the numbers look worse than they are. Considering the issues surrounding the previous CEO and his departure from the company, there might be some concern that the new CEO did not come from outside the company. However, the bright side is that the new CEO, being the former COO, understands the company’s operations.
Natural gas production accounts for 70% of the company’s total production. The other 30% is called liquids production and is two-thirds oil and one-third natural-gas liquids. Natural-gas liquids are components that are absorbed into gasses such as propane, butane, etc. It’s economic to extract those and sell them. Despite liquids being 30% of the overall production, they were 62% of the revenue for 4Q 2012.
Rising prices should re-balance those numbers as natural gas attracts more money to the company. Also, once the price rises high enough, Chesapeake Energy Corporation (NYSE:CHK) can increase production, which means it can make more money per unit and produce more units of gas by extracting more expensive gas.
Much of the profit from the previous quarter came due to oil. Oil is still going to be the key product for the company for the remainder of 2013, as the price of natural gas is not expected to rise too much. However, there are a lot of forces over the next two-to-three years that could put upward pressures on natural gas, and these will continueas natural gas becomes increasingly important.
Many factories producing LNG and compressed natural gas (CNG) are expected to come online by 2015, and there are potential developments on the political front, as well. The massive beast of a floating LNG plant is likely to be completed by 2017, but it’s gigantic, which is why it is later. Smaller plants will come online sooner.
These overarching factors will work in Chesapeake Energy Corporation (NYSE:CHK)’s favor, and oil will keep the company growing in 2013. Oil is likely to be responsible for 51% of revenue this year, according to the company. A patient investor has the chance to invest in the long game that is natural gas, and you can collect a very modest 1.7% dividend yield in the mean time.
Unraveling the fear
Linn Energy LLC (NASDAQ: LINE) has mostly recovered from its fall down to $36 and shares are now trading in the mid-$38 range. However, the stock is lower than when I first noticed it at above $40. There were some murmurs of accounting problems a few months ago that brought the stock down. It was not a huge decline considering the high dividend and the lack of substantive evidence.
The company managed to increase its distributions and expand its operations in a deteriorating price environment. It seems like sound logic that increases in natural gas prices will eventually work in the company’s favor.
Linn Energy LLC (NASDAQ: LINE) also seems to be beefing up its oil reserves. Its acquisition of Berry Petroleum Company (NYSE:BRY) gives it primarily reserves in oil. That diversity should help it get through the near term, and should allow the company to keep paying its great 7.6% dividend.
