Exploring in Houston

06/27/2003 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

"Unanimity on anything as volatile as gas prices makes us nervous, and investors should realize that many gas stocks already reflect expectations of high prices," cautions Richard Moroney in Dow Theory Forecasts. "Even Alan Greenspan in his June testimony before Congress noted that the long-term equilibrium price for natural gas in the US has risen persistently during the past six years.’ Still, the bullish case for gas suggests investors should include some gas exposure in portfolios." Here's his favorite long-term play on higher gas prices.

"Investors who want a leveraged play on natural gas should look at Houston Exploration (THX NYSE), our top pick in the exploration-and-production group. Consensus estimates project that per-share profits will double this year to $4.25, then fall 9% to $3.86 in 2004. Big profit gains and reversals are common for Houston, mostly because its results depend heavily on the movement of gas prices. In the March quarter, the company’s daily production rose to 288 million cubic feet of natural gas per day, up 4% from the year-earlier quarter. Houston has hedged most of its expected 2003 and 2004 gas production, locking in downside protection while leaving room to participate in upward price movements.

"At eight times projected 2003 profits of $4.25 per share, Houston Exploration trades at a discount to most of its peers. While the current valuation is unduly low, Houston Exploration historically is cheaper than its peers, in part because KeySpan Energy owns 55% of the shares. KeySpan has considered its interest in Houston Exploration ‘noncore’ since 1999 and recently reduced its stake. Further reductions are likely, though the timing is uncertain. While Houston Exploration faces uncertainties about gas prices and the KeySpan stake, its production portfolio remains attractive and its finances strong. The stock is rated a ‘Buy’."

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