3 Hot Natural Gas Stocks to Buy Now

by Susan J. Aluise | August 10, 2011 9:25 am

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[1]) 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.

Range Resources

Range Resources (NYSE:RRC[2]) set a new 52-week high of $67.33 last week but got hammered by the market sell-off. Even at $53.25, RRC is trading more than 65% above its 52-week low of $32.25 last August. With a market cap of $8.49 billion, RRC has a PEG ratio of 1.70, which is slightly overvalued. The company’s debt position is better than COG’s, with total cash of $288.84 million compared to total debt of $1.79 billion. Still, quarterly year-over-year earnings growth is a smoking 466.6%, and it pays a dividend yield of 0.3%.

The Edge. RRC’s 27-cent EPS was more than double analysts’ consensus estimates of 12 cents — revenue jumped by more than 60% thanks to a surge in production volume. RRC also has a play in the Barnett Shale, as well as a focus on liquefied natural gas.

EQT Corp.

EQT Corp. (NYSE:EQT[3]) also set a new 52-week high of $65.17 last week, but it, too, fell victim to the ravenous bears. At $49.18, the stock still is trading more than 52% above its 52-week low of $32.23 last August. With a market cap of $7.60 billion, EQT has a PEG ratio of 1.09, meaning that it is valued about right. The company’s debt position could be better, with $79.22 million in total cash versus total debt of $2.01 billion. Still, quarterly earnings growth is 192.5%. The stock pays a very nice dividend yield of 1.6%.

The Edge: EQT delivered a second-quarter EPS of 51 cents, beating analysts’ 43-cent estimate. Revenue of $349 million beat the expected $315.8 million. EQT’s cash cow for the quarter was its Marcellus Shale operation, where production rose by 47%. Because the company owns its midstream operations, it can achieve tighter coordination between those operations and its production unit.

Bottom Line

The natural gas supply glut is depressing prices at present, but that scenario will start to turn around by 2012. These companies are growing earnings now and should continue to do so as shale exploration expands. Since the market hammered virtually stock in recent days, these shares are a bargain right now that will only improve with a little time in your portfolio.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.

Endnotes:

  1. COG: http://studio-5.financialcontent.com/investplace/quote?Symbol=COG
  2. RRC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRC
  3. EQT: http://studio-5.financialcontent.com/investplace/quote?Symbol=EQT

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