So far, natural gas hasn’t fully joined the commodities party. From when we wrote about it last November, prices of the raw material have risen less than 10%. That’s because a huge supply overhang in the US – the world’s top producer – has had to be worked off.
But in the last six months, surging oil prices and uncertainty about nuclear power have provoked a global search for alternative energy sources, so natural gas is attracting much more interest. Indeed, as Mad Money’s Jim Cramer noted a month ago, for every country in the world bar the US, natural gas is about to become the fuel of the future – “that’s why there are so many foreign buyers”. As a result, US firms will find ways to export it: conversion to liquefied natural gas (LNG) makes storage and transport much easier.
But the good news for natural gas doesn’t stop here. The US is finally cottoning onto the opportunity on its doorstep. “A proposed energy plan working through Congress could change the energy landscape in America,” says Adam Crawford of the Motley Fool. The NAT GAS Act would provide hefty tax credits “to encourage the use of its vast natural gas resources as a transportation fuel”.
That would give a big boost to domestic demand just as global buying is on the rise. That points to a much brighter future for natural gas. So what stocks to buy? The shares of several smaller natural gas plays have already jumped. Last November we tipped gas carrier Golar LNG (Nasdaq: GLNG), which had soared by 130% to end-April.
After a slight pullback Golar could still be worth holding. But with even the 2012 p/e now 16 and the prospective yield down to 3.4%, most of the near-term action has probably happened. Major US well owner Chesapeake Energy (NYSE: CHK) has also enjoyed a strong run since our $22 ‘buy’ call. At $31 this stock still looks OK on a current year 10.7 p/e which is forecast to drop to a single-digit multiple in 2012.
PetroChina Company Limited (NYSE: PTR) is one of the world’s largest energy firms, with a $308bn market value. It’s been an oil company mainly, but in the last two years has hunted for more gas-related assets. In 2010 it joined with Shell to buy Australian coal-bed gas group Arrow Energy Limited, and last month invested $5.4bn in Encana’s Cutbank Ridge shale gas assets. The shares are barely changed on 18 months ago. On a current year p/e of ten, with a more-than twice-covered 4.6% prospective yield, this stock could soon attract much more attention.
France-based giant Total (FR: FP) is similar. Although better known as an oil company, it’s actually the world’s fourth-largest listed natural gas producer. Last year, Total moved into the US by investing $2.25bn in the gas-rich Barnett Shale bedrock formation in northern Texas. Again, investors havelargely ignored Total shares, but on a 2011 multiple of eight and prospective 5.3% yield, they’re now very cheap.
More expensive, but worth a look, is $36bn US oil and gas producer, and natural gas processor, Devon Energy (NYSE: DVN). The stock stands on a current year p/e of 13.5, but that’s expected to drop to just over ten in 2012. Mark Gilman at Benchmark has a $135 price target, almost 60% above today. Drilling and service firms “are going to reap the benefits of the next drilling boom”, says Keith Shaefer in Oil and Gas Investments Bulletin. High-pressure pumps “are key to making unconventional gas a viable proposition”. That could make service business Flint Energy Services (TSX: FES) interesting. Weak results have dragged its shares down, but as Maxin Sytchev of NCP Northland says, “sentiment should improve once we see tangible evidence of new [orders] coming in”. He reckons the stock is selling on below ten times next year’s earnings and has a price target 40% above today’s C$14.3 level.
Category: Market updates