A Low-Risk Bet on Natural Gas

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When it comes to natural gas-focused exploration and production companies, there's no shortage of strong options out there. I recently wrote about Range Resources (NYSE: RRC  ) going on sale, and my colleague Michael Olsen tapped Ultra Petroleum (NYSE: UPL  ) for the Fool's "11 O'Clock Stock" feature. When it comes to E&Ps focused on onshore North American resource plays, those are two of the best companies on the block.

A third company that gives me the warm fuzzies is Southwestern Energy (NYSE: SWN  ) . Alongside Terra Nitrogen (NYSE: TNH  ) and Contango Oil & Gas (AMEX: MCF  ) -- another favorite E&P of mine -- Southwestern was one of the best-performing stocks of the past decade. The company's first-mover position in the Fayetteville shale makes it one of the rare organic growth stories in an industry dominated by mergers and acquisitions.

With other plays like the Eagle Ford stealing the spotlight these days, the Fayetteville may seem like old news. Southwestern is achieving terrific results in this Arkansas powerhouse, however. Finding and development costs ran at $0.69 per thousand cubic feet of gas in 2009. Companywide cash flow margins ran at 67% last year, reflecting these rock-bottom costs. Even with higher-priced natural gas hedges rolling off this year, those margins are still running at 61% year to date.

Southwestern's outstanding profitability at poor prices is one reason why I've chosen to highlight this company as a low-risk bet on natural gas. A second reason is that Southwestern, while a modest player in the Marcellus, is not as exposed to the regulatory "headache" up there as Range, Ultra, Talisman Energy (NYSE: TLM  ) , or any of the other companies that are really ramping up there. For now, Southwestern is running just one rig in the play. Management explains the approach this way:

"We don't want to jump out there and put a bunch of rigs to work and then have this thing crash around us either. So we're taking it cautious, being flexible with it."

That seems like a reasonable approach to me. If operating in Pennsylvania gets easier, you can bet you'll see Southwestern increase its activity significantly. Until then, the company will keep cranking out strong results from its core Fayetteville play, which hasn't stirred anywhere near as much controversy. And if the backlash against hydraulic fracturing heats up further, as seems to be the case in New York State, then Southwestern will pick up and leave. That would be harder for Ultra, or especially Range, whose fate is highly dependent on future decades of Marcellus shale development.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Fool owns shares of Ultra Petroleum. The Motley Fool has a disclosure policy.

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  • Report this Comment On August 16, 2010, at 4:08 PM, gcoren wrote:

    i am under the impression that swn has a solution to reduce the dependence on chemicals to frac using ecosphere technology chemical free process...............please acknowledge.........

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