As every investor knows, when supply of a commodity outpaces demand, prices will tank. And that’s exactly what’s happened in the natural gas marketplace. New technology makes it easier to drill in challenging natural gas reservoirs like the Barnett Shale, which could contain the largest onshore reserves in the U.S. No wonder natural gas that was selling for $13.75 per million British Thermal Units (MMBTUs) in mid-2008 is now priced at $4.32/MMBTU.
Over the past several years, natural gas prices have been more volatile than oil prices, much to the chagrin of investors in natural gas stocks. Between mid-2008 and early 2009, natural gas stocks fell by as much as 70%, so it stands to reason that investors once bitten would be twice shy.
Fact: A lot of new supply is coming into the market. Some analysts say the shale gas boom is a short-term factor, but others believe production will increase four-fold over the next 30 years. Plentiful supply might continue to depress natural gas prices in the short term, but the quest for U.S. energy independence and utilities’ quest to replace dirty coal will drive up prices – and profits.
Other factors also should spur natural gas demand: a re-examination of nuclear power after Japan’s Fukushima I disaster, the opportunity to export liquefied natural gas and growth in natural gas-fueled vehicles.
That makes investing in natural gas stocks a little like buying a big, French claret that needs some time in the wine cellar to hit its peak. In that vein, here are three stocks to buy now and hold for later:
Cabot Oil & Gas
Cabot Oil & Gas (NYSE:COG) just set a new 52-week high of $78.94 on July 28, but like every other stock, it’s been mugged in the market this week. Even at the current price of $61.48, Cabot is trading nearly 131% over its 52-week low of $$26.62 last September. With a market cap of $6.46 billion, COG has a price/earnings-to-growth ratio of 1.42, indicating the stock might be slightly overvalued. Leverage is a bit of a challenge, with total cash of $39.31 million versus total debt of $1.10 billion. The bonanza? Quarterly earnings growth year-over-year is a wicked 152.2%. It also pays a dividend yield of 0.2%.
The Edge: Cabot’s 41-cent second-quarter earnings per share blew away analysts’ 28-cent estimates. The company’s natural gas output grew by 49%, and it is well positioned in the Marcellus Shale and Eagle Ford plays.