Investing: Cash in on the revolution in natural gas
One reason for the turnaround is the use of hydraulic fracturing, or fracking, in horizontal wells, which allows for vastly increased amounts of oil and gas extracted from shale. This ability to pull gas out of previously unfriendly rock has been a boon for production but -- at least from an investor's viewpoint -- a bane for prices. Natural gas, which sold for $10.91 per thousand cubic feet in 2005, was selling for $3.41 in July. That's partly because domestic use of energy is on the decline, leaving newly prolific producers with more supply than demand.
U.S. companies are also hampered in their ability to sell gas overseas, where prices are far higher. Opening the export market would boost demand and create greater parity between international and domestic prices, a move almost certain to boost domestic gas prices. But because no one knows when supply and demand will come into better balance, your best bet is to invest in low-cost producers that can make money even when gas prices are low.
Three attractive producers are Range Resources (symbol RRC), Cabot Oil & Gas (COG) and Southwestern Energy (SWN). All three have stakes in the Marcellus Shale basin in southwestern Pennsylvania, which produces prolific amounts of energy for a relative pittance. All three are growing and profitable. But earnings could soar if gas prices rise to $4.50 to $5 per thousand cubic feet.
Range, which has a one-million-acre shale-bearing property in the Marcellus region, predicts that its gas production will soar seven- to tenfold over the next few years. The Fort Worth-based company reported that revenues rose 50 percent and profits soared 159 percent in the second quarter from the same period in 2012. Its stock isn't cheap, however. At $77, Range sells for 42 times projected earnings for the next 12 months. Still, if the projected growth rates hold, Range's stock price could prove to be a bargain.
Cabot sells for a similarly lofty price, trading for 30 times estimated year-ahead earnings. The Houston concern expects to boost gas production in the Marcellus region by 30 percent to 50 percent annually over the next several years.
Southwestern started to lease Marcellus land in 2007, making it one of the newer players in the region. Overall, Southwestern's growth rate is slower, so its stock, selling for 17 times forecasted year-ahead profits, is less pricey than the other two.
(Kathy Kristof is a contributing editor to Kiplinger's Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. And for more on this and similar money topics, visit http://www.Kiplinger.com.)
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