by Jeff Reeves | April 23, 2013 12:40 pm
Click to Enlarge Natural gas is a favorite fuel among politicians and businesses because it’s among the cleanest-burning fossil fuels and has been relatively cheap for several years now thanks to oversupply driven by widespread fracking production.
But quietly, natural gas has been firming up. Though still down dramatically from its peak, the energy commodity just hit a two-year high. And the United States Natural Gas Fund (NYSE:UNG) — an exchange-traded product that tracks natural gas futures — has doubled the market with almost 25% gains since Jan. 1 and over 50% gains in the past 12 months.
So is now the time to buy natural gas stocks in hopes of higher prices and higher demand? Maybe. After all, continued economic recovery will ramp up energy demand, and at the same time, producers are increasingly reluctant to feed oversupply after the glut from a few years ago. That will add pricing stability.
And if we see a rollback in the current strength of the dollar, which has been an anchor on commodity prices, it could be time for a big move in gas stocks.
If you like this trade, three explosive gas stocks to check out right now are:
Encana (NYSE:ECA) is a Canadian natural gas play that has underperformed significantly lately despite the rise in gas prices. It’s actually in the red year-to-date in part because it just posted a pretty steep loss for fiscal 2012 in February.
However, on the plus side, Encana boasts $3.2 billion in cash and equivalents on the books and is projected to finish soundly in the black this year, followed by continued improvement in fiscal 2014. Longer-term, there’s big potential for future growth since Canada is aiming to become a major LNG exporter to the U.S. and abroad.
ECA stock trades at about 15 times forward earnings. Throw in a 4.3% dividend, and you have a pretty good long-term play here.
Devon Energy (NYSE:DVN) also has underperformed in 2013, but has high hopes going forward. With a market capitalization of over $21 billion, DVN is one of the largest players in the space. It was cobbled together with a series of acquisitions in the early 2000s, and has a dominant position in the industry with some 25,000 wells in the U.S. — including a particular focus on the Barnett Shale in Texas.
Like Encana, Devon closed out a rough 2012 that was characterized by soft natural gas prices and an operating loss for the fiscal year. But things are turning around as gas prices move higher. Right now, 26 analysts have price targets on DVN stock, and all are above current valuations with a median target of $70 a share.
Devon Energy boasts a big war chest and a decent valuation. Specifically, DVN has almost $7 billion in cash and short-term investments and a forward P/E that is presently around 10. The dividend isn’t impressive at a 1.7% annual yield, but payouts have increased almost tenfold in the past decade, so there is long-term income potential here.
Southwestern Energy (NYSE:SWN) is an independent natural gas company focused on the Fayetteville Shale in Arkansas and the Marcellus Shale in Pennsylvania.
Unlike the previous two stocks, Southwestern doesn’t pay a dividend, so you’re banking simply on share appreciation. But the good news is that SWN stock is up 25% in the last year and hasn’t quite seen the headwinds that Encana and Devon have. That’s because Southwestern also has some crude oil operations that have kept its fundamentals slightly better.
The company has a forward price-to-earnings ratio of about 17.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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