Natural gas prices have been in recovery since hitting a multi-year low in early 2012 due to over-supply and warm weather reducing demand. At that time, natural gas was priced as if it was a fuel of the past versus a fuel of the future. We know that is not the case as natural gas has seen overall consumption increases in recent years and low prices will continue to spur demand. On the production side, many exploration companies reacted quickly to the over-supply by curtailing exploration and curbing production.
Regardless of the current circumstances, natural gas has proven to be a volatile commodity making investments directly into natural gas producers a risky and volatile proposition. So how can an investor get exposure to natural gas, eliminate the volatility, and get paid to do it? There are two diversified utilities that not only supply natural gas to end users, but also have considerable natural gas exploration and production operations.
National fuel and gas
In addition to supplying natural gas to approximately 733,000 customers in western New York and northwestern Pennsylvania via its utility operations, National Fuel Gas Co. (NYSE:NFG) is involved in the exploration and production of oil and natural gas through its Seneca Resources subsidiary.
The largest holdings for Seneca are primarily located in the Appalachian region of the country with exposure to the Marcellus Shale and Utica Shale formations. Seneca is in the enviable position of owning most of the mineral rights in approximately 720,000 acres of the 775,000 net acres it owns in the area located primarily in the state of Pennsylvania. In addition to its Appalachian acreage, Seneca has 18,418 net acres in California and took a 9,300 net acre position in Kansas targeting the Mississippian Lime Formation.
National Fuel Gas Co. (NYSE:NFG) also has midstream operations that include pipelines and storage as well as an additional downstream operation through its National Fuel Resources subsidiary which engages in energy marketing. Operating income in 2012 was primarily provided by a 44% contribution by upstream operations, followed by 29% from the midstream, and 27% from downstream operations.
At recent market prices, National Fuel Gas was yielding approximately 2.5%
Many resources
A company that has diversified well beyond energy is MDU Resources Group Inc (NYSE:MDU). Like National Fuel Gas Co. (NYSE:NFG), MDU Resources is engaged in the distribution of natural gas, as well as, the exploration and production of natural gas. However, MDU Resources also has exposure to the building and infrastructure sectors through its construction services and aggregates divisions.
MDU Resources Group Inc (NYSE:MDU) operates its exploration and production efforts through a wholly-owned subsidiary, Fidelity Exploration and Production Company. Currently, Fidelity has focused on its liquid rich plays targeting the Bakken through 127,000 net acres and approximately 92,000 net acres with another 20,000 net acres under option in the Paradox Basin located in Utah.
There is also a 9,000 acre position in South Texas. Additionally, the company holds a 36,000 acre position in the Green River Basin of Wyoming as well as an additional 250,000 acres in Montana, North Dakota, and Texas all primarily targeting natural gas.
The regulated utility operations supply natural gas to 865,000 customers and electricity to 132,000 customers primarily in the Pacific Northwest. The utility also has 3,100 miles of transmission lines and 4,700 miles of distribution lines.
The construction materials division is a top 10 domestic producer of sand, gravel, aggregate and ready-mixed concrete in the United States. The company has approximately 1.1 billion tons of aggregate reserves. The construction services division is engaged in the construction of power lines, gas pipelines, substations, external lighting as well as commercial electrical, cabling and mechanical services.
MDU Resources Group Inc (NYSE:MDU) is very evenly diversified between its operating divisions with the regulated utility contributing 34% of adjusted earnings followed by both Fidelity and the construction divisions each supplying 33% of adjusted earnings. During the first quarter of 2013, Fidelity saw production evenly distributed between oil and natural gas at 46% each, while natural gas liquids contributed the remaining 8% of production.
At recent market prices, MDU Resources Group Inc (NYSE:MDU) was yielding approximately 2.8%.
Pure play
Admittedly you are not going to get the upside if natural gas moves to higher levels as you would if you owned a more pure play like Chesapeake Energy Corporation (NYSE:CHK). Chesapeake is the largest nearly pure play on the exploration and production of natural gas. The company has certainly felt the pain of the natural gas glut and has been forced to sell assets in order to service its high debt levels.
Even though pricing pressure has forced Chesapeake Energy Corporation (NYSE:CHK) to allocate a large percentage of its capital expenditures to liquids rich plays, the company still owns vast dry gas plays with exposure to the Marcellus, Barnett, Haynesville, Bossier, Eagle Ford and Utica shale plays. Its leaseholds total approximately 14 million net acres and proved reserves are approximately 19.6 trillion cubic feet equivalent.
Final thoughts
If natural gas tanks again, MDU Resources Group Inc (NYSE:MDU) and National Fuel Gas Co. (NYSE:NFG) offer an investor some downside protection through their much more stable utility operations as well as other operating divisions. It should also be noted, most utilities have performed well as investors have been seeking yield. This demand for higher yields still exists, but when investors begin to shun current yield for growth, utilities will be negatively impacted. In this scenario, the diversification of National Fuel Gas and MDU Resources could provide a cushion.
Alex Gray owns shares of MDU Resources Group, Inc. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
The article A Diversified Way to Play Natural Gas originally appeared on Fool.com.
Alex is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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