Many investors seemingly have just one energy commodity on the brain: crude oil. But anyone digging around for value stocks should have their eye on the funk in natural gas, too.
Like crude, natural gas has suffered from the 1-2 punch of high supply and low demand. Prices have plummeted from some $4 per million British thermal units to about $2.60 per million Btus today.
That has crushed natural gas exploration and production firms. The sector proxy — the First Trust ISE-Revere Natural Gas ETF (FCG) — is down nearly 70% in just a year’s time. We’ve already seen two major nat gas producers — Samson Resources and Quicksilver Resources (KWKAQ) — file for bankruptcy protection.
But, as is the case when an entire sector bleeds, some companies have turned into screaming value stocks along the way. In fact, many natural gas producers could be better buys here than the battered crude oil players.
Here are five such value stocks in the nat gas space to buy today.
Value Stocks in Natural Gas: Devon Energy (DVN)
Devon Energy (DVN) is about as blue-chip as the natural gas space gets. Devon has been a fracking pioneer and operates in some of the richest natural gas fields in the country.
DVN also has become one heck of an oil and natural gas liquids driller. Production of all three commodities continue to rise from its acreage across Eagle Ford, Barnett and Permian Basins.
The market’s hardly impressed — DVN stock has been cut by nearly half over the past year on lower natural gas prices.
But there’s plenty to love about Devon Energy. For one, it has the financial strength to sit back and wait for higher prices to lift the tide. Devon has one of the strongest balance sheets in the E&P space, including investment‐grade credit ratings and ample liquidity.
Also benefiting DVN is its holdings in MLP EnLink Midstream Partners (ENLK). Aside from the dividends it provides as well as potential drop-down payments, Devon has the ability to monetize (read: sell) its ENLK holdings at any time. That’s a huge source of cash that many natural gas E&P firms simply don’t have right now.
DVN has a safe (and growing) dividend that yields just more than 2% as well.
All that is plenty of reason to consider Devon Energy a bargain buy.
Value Stocks in Natural Gas: Range Resources (RRC)
RRC is natural gas.
Range Resources was one of the first E&P firms to start prospecting and buying acreage in the leading natural gas shale, and now the driller holds one of the largest acreage positions in the region. That position is currently north of 1 million acres. And that acreage position happens to be a layer cake of epic proportions.
RRC’s holdings straddle three different shales — the Marcellus in the middle, with the Upper Devonian and Utica on top and bottom. What this means is that Range can drill one well and hit all three shale formations at once. That’s a nice trick that gives RRC one of the lowest cost profiles around when it comes to natural gas.
Also, most of Range’s acreage is in the liquids-rich window of the Marcellus, so RRC pulls out a ton of NGLs along with its dry gas.
RRC stock be had for a price-to-earnings ratio of 17, which is crazy cheap for Range based on historic numbers. Granted, that’s because low natural gas prices are eating into RRC’s profitability, but like the rest of these stocks, Range is a play on a rebound in nat gas.
Value Stocks in Natural Gas: WPX Energy (WPX)
Spun off from midstream firm Williams Companies (WMB) back in 2012, WPX Energy (WPX) is a natural gas giant in its own right. Through its holdings in Colorado’s Piceance Basin, WPX produces more natural gas in Colorado than anyone else in the state. Its 4,700 active wells produce enough gas to power 2.5 million homes per day.
That size and scope make WPX one of the most efficient operators in the region. WPX’s production costs are about 20 to 30% lower than rivals, as it has been a huge proponent of multipad well drilling. The natural gas firm also was an early adopter of walking rigs. Likewise, WPX uses excess gas produced at its well to power equipment do the drilling.
Despite its low-cost mantra, WPX stock has cratered along with natural gas prices. Shares of the natural gas producer have fallen by almost 80% since natural gas started to plunge last summer. That has WPX trading at just five times earnings.
For that cheap price, investors can access 3 trillion cubic feet of proved natural gas reserves, 70 million barrels of proved NGL reserves and a quickly growing portfolio of oil assets as well.
Value Stocks in Natural Gas: QEP Resources (QEP)
The vast bulk of QEP Resources’ (QEP) revenues (64%) comes from natural gas and NGLs. So needless to say, QEP stock has tanked — by about two-thirds — as lower prices have taken hold.
But at $13 per share, QEP might have a place on a list of value stocks to buy.
In the main areas it operates in — Wyoming’s Pinedale Anticline, Utah’s Uinta and Louisiana’s Haynesville Shale — QEP is one of the main leaders with sizable acreage positions. That has helped it realize huge cost advantages and savings. Like WPX, QEP has also been a first adopter of new drilling and rig technologies designed to reduce costs and improve efficiencies.
Also helping has been its newfound love of crude oil. While QEP is still very much a natural gas play, the firm has expanded into the prolific Permian and Bakken shales. Oil and liquids production/reserves have grown and balanced portfolio allows it run over the long term throughout all commodity market cycles.
QEP is certainly using that to its advantage. It recently stopped work in the 100% dry Haynesville and moved those rigs to the oily areas.
Value Stocks in Natural Gas: Rice Energy (RICE)
Founded by former BlackRock (BLK) energy guru Daniel J. Rice, Rice Energy (RICE) is quickly becoming one of rising stars in the natural gas world. Like Range Resources, RICE has been targeting southwest Pennsylvania and southeastern Ohio. This is where the Marcellus Shale is sandwiched between the Utica and Upper Devonian.
Rice’s total 141,000 acres in the region can hit pay dirt on all three plays.
As such, RICE has quickly become a top-20 natural gas and liquids producer in the region, with decent margins in a short amount of time. Rice also saw production of 529 million cubic feet per day for the second quarter — more than double what it produced in the year-ago period.
Rice Energy also benefits from its midstream relationship. Shortly after going public, Rice plowed some capital into a portfolio of midstream and gathering assets in the Marcellus. It later placed those pipelines into an MLP, dubbed Rice Midstream Partners (RMP). Along with the distributions it received, the RMP transaction gave RICE plenty of balance sheet flexibility and extra cash flows.
Meanwhile, the firm’s aggressive hedging book and ample liquidity enhance its position.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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