Three Natural Gas Power Plays

02/25/2008 12:00 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Jim Jubak, senior markets editor at MSN Money, says natural gas power plants will make a big comeback in the US, and he recommends three stocks that could benefit.

The renaissance in coal-fired electric plants has hit a snag, and some areas of the United States could be looking at electricity shortages and soaring utility bills. The quick fix-and the only one available because we don't have a national energy plan-is to build more power plants that burn natural gas.

Here's the problem: more than 10,000 megawatts of power-generating capacity need to be added annually in the US to keep up with projected 2% annual growth in demand for electricity over the next ten years.

New coal-fired plants were supposed to supply much of that electricity, [but] just 808 megawatts of new coal-fired capacity are expected to actually go on line in 2008, plus 6,498 megawatts in 2009 and 8,285 megawatts in 2010. Even if all of the announced coal-fired plants are built as scheduled, new capacity still falls short of 10,000 megawatts a year.

Compared with coal-fired plants, natural gas plants require less concrete, less steel, and less time to build. And natural gas releases less carbon per unit of energy when it's burned than coal does. A natural-gas-fired plant is about 25% cheaper to build than a similar coal-fired plant.

So, sure enough, we're seeing a surge in gas-fired power plants. The added demand for natural gas is especially promising for domestic producers. With demand rising and overseas supplies of liquefied natural gas constrained, prices for natural gas and the shares of US natural-gas producers are headed up in 2008.

Personally, I'd wait for another drop in the sector before buying, but if you just have to buy something or if you want to trade the ups and downs of this market, you can't do much better than this sector.

Here are three of the stocks I like best:

  • EOG Resources (NYSE: EOG) [has] about 60% of its oil and natural-gas resources in the US and another 20% in Canada. EOG is especially strong in the Barnett Shale region of Texas and in the Rockies. The company had 6.8 trillion cubic feet equivalent of reserves at the end of 2006. About 90% of that was natural gas. (It closed above $99 Friday-Editor.)
  • Ultra Petroleum (NYSE: UPL)'s costs are falling when just about every other energy company is showing rising costs. Lease-operating expenses per unit in 2008 could be a whopping 40% below that of industry peers, according to Standard & Poor's. Proven reserves climbed 18% in 2006 to 2.4 trillion cubic feet equivalent. (It closed below $77 Friday-Editor.)
  • XTO Energy (NYSE: XTO), like EOG, is strong in the Rockies and in Texas. The company projected production growth of 18% in 2007 and 17% in 2008. Total proven oil and gas reserves climbed 12% in 2006 to 8.55 trillion cubic feet equivalent. As of February 12th, this was the strongest chart in the sector. (It closed below $58 Friday-Editor.)

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