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Bottom Fishing in Natural Gas
11/09/2015 9:00 am EST
With oil falling over 60% from its 2014 highs, all the natural gas stocks have been sold-off, regardless of cash flows or balance sheets, observes Marshall Hargrave in Daily Profit.
But was it justified? The price of US natural gas recently fell below $2 per million British thermal units this week. It was the first time it dipped that low since April 2012.
The worry? There's just too much natural gas in the market. What's more is we could see a warm winter, which may lead to a further supply glut.
Still, it appears there's a lot of fear priced in. Too much fear, perhaps. Forecasts might be overlooking the fact that the recent price drop should quickly discourage any new drilling.
The broader thought is that the market is not separating oil from natural gas, having extrapolated the recent pain in oil stocks to natural gas stocks.
Bottom fishing in the natural gas space isn't for the faint of heart, however. These are high-risk, high-reward stocks. But with that in mind, the recent carnage in the natural gas stocks could be presenting buying opportunities:
Range Resources (RRC)
Range Resources' big advantage is its strong position in one of the best oil and gas resource plays in North America—the Marcellus shale—where the company has upward of 20 years of inventory.
Range is no stranger to growing organically. It's focusing on moving more gas to Canada, where there's already a large pipeline and storage infrastructure in place. There's also an increased opportunity for more gas usage in Canada as the country shifts away from coal.
Consol Energy (CNX)
This is probably the riskiest of the three stocks on our list. It's been restructuring by downsizing its coal footprint to focus more on natural gas.
But Consol still has efficient coalmines that operate at low costs. That cash flow goes toward boosting the company's development of its gas assets.
Longer-term, the idea is for Consol to transition into a pure-play natural gas explorer and producer, with a focus on the Utica and Marcellus shales. This means finding ways to monetize its Baltimore port terminal, thermal and metallurgical coal assets, and pipelines.
Chesapeake Energy (CHK)
Chesapeake is one of the biggest natural gas players in the United States, with acreage in nearly every US natural gas resource area. If history is any testament, Chesapeake has survived natural gas market collapses and headwinds before.
Chesapeake has had to address liquidity concerns of late, because it loaded up on debt following the 2008 financial crisis to buy assets.
The company has reined in spending since ousting its founder and CEO, Aubrey McClendon, in 2013; it's been renegotiating contracts and selling off assets. It also announced a 15% reduction in its workforce.
In the end, it seems that everyone has forgotten about natural gas. Bottom fishing isn't for everyone, but for long-term investors willing to sit through some near-term volatility, Chesapeake, Consol, and Range could be bargains.
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