The 9 Largest Natural Gas Producers and 1 to Buy Now

Natural gas is booming in the U.S., and there’s money to be made. I've already revealed my secret to commodities investing and a way to get huge dividends from America’s energy game changer.  Read on to find the names of the 9 largest natural gas producers in the U.S. and the one I like best.

NatGas!
In the past few years, new technologies and cheaper costs have allowed producers to access gas trapped in parts of the U.S. previously considered unreachable. As more companies have tapped these unconventional plays, U.S. natural gas production has risen roughly 25% over the past five years, to 78 billion cubic feet per day. Experts expect production to keep rising over the next 25 years, to 113 Bcfd by 2035.

The biggest contributors to this growth are the following nine companies, which are the nine largest natural gas producers in the United States:

 

Company

Q2 U.S. Nat Gas Production (MMcf/day)

1 ExxonMobil (NYSE: XOM  ) 3,842
2 Chesapeake Energy (NYSE: CHK  ) 2,575
3 Anadarko Petroleum (NYSE: APC  ) 2,326
4 Devon Energy (NYSE: DVN  ) 2,029
5 Encana (NYSE: ECA  ) 1,864
6 BP (NYSE: BP  ) 1,833
7 ConocoPhillips (NYSE: COP  ) 1,651
8 Southwestern Energy (NYSE: SWN  ) 1,347
9 Chevron (NYSE: CVX  ) 1,299

Source: Natural Gas Supply Association.

If you believe in the huge opportunity of natural gas, these companies all look tempting. However, you can’t just go out, pick the largest, and call it a day. It’s very important to understand a firm’s overall production mix when looking at oil and gas stocks.

 

Company

Total Production (MMcfe/day)

U.S. Nat Gas as % of Total Production

1 ExxonMobil 26,376 14.5%
2 Chesapeake Energy 3,049 84.5%
3 Anadarko 4,110 56.6%
4 Devon Energy 3,960 51.2%
5 Encana 3,395 54.9%
6 BP 20,598 8.9%
7 ConocoPhillips 9,840 16.8%
8 Southwestern Energy 1,364 98.7%
9 Chevron 16,140 8.0%

Source: Company statements.

As you can see, while ExxonMobil is the largest U.S. natural gas producer, U.S. natural gas only makes up 14.5% of the company’s total production. The best plays on natural gas are the companies in which natural gas makes up the majority of their production. With that in mind, we have Chesapeake Energy at No. 2, with U.S. natural gas making up almost 85% of its total production. While I do like Chesapeake, the company I want to highlight today is actually eighth on the list, Southwestern Energy, with almost 99% of its total production coming from U.S. natural gas. While Chesapeake also is notable for its large production of natural gas, I like Southwestern Energy for one key reason: costs.

Low cost producer
Currently there is a rush to secure drilling leases in the U.S., which is keeping natural gas supply higher than demand. This has pushed down the price of natural gas in the U.S. to a very low $3.96/mcf, below many producers’ cost of production, including Chesapeake’s, whose total cost of production was $7.59/mcf in the past six months. Southwestern Energy is one of the lowest cost producers of natural gas, with total costs coming in at $3.93/mcf.

A low cost of production is important because when a commodity is unprofitable, high-cost producers die off or halt operations. The industry shrinks, leaving only the most efficient firms as higher-cost producers gradually halt operations. As high-cost producers stop production and supply shrinks, the price of the commodity gradually rises to the industry’s cost of production. In the case of natural gas, the industry average cost of production is roughly $5-$6/mcf. We are seeing the beginnings of this currently with the industry moving toward drilling for oil and natural gas liquids plays as opposed to straight natural gas plays.

Southwestern’s low costs stem from the Fayetteville Shale, one of the country’s largest fields, which Southwestern discovered almost a decade ago. The firm was able to acquire nearly 900,000 acres in Fayetteville for $100 an acre, which are now worth roughly $15,000 an acre. Besides prime real estate in a very profitable field, Southwestern saves money through the large economies of scale from its ownership of its own drilling rigs and pipelines, assets most exploration and production companies don’t have. At $5/mcf, Southwestern is worth roughly $45-$50, a 30%-40% discount to today’s price.

Catalysts!
Besides the price of natural gas rising (very likely in the next few years) or a buyout (shale M&A is hot and expanding), Southwestern has another catalyst. Management is considering a spinoff or sale of its midstream assets (pipelines). If valued on a comparable level to Chesapeake Midstream Partners (NYSE: CHKM  ) , which was Chesapeake Energy’s midstream assets, these would be worth roughly $7 per share -- which the market isn’t currently factoring in. Management has said they will probably decide by the end of the year whether or not they will take this value-unlocking course of action.

Foolish bottom line
Natural gas is changing the face of energy in North America. If you're looking for more stock ideas, check out The Motley Fool's free report, "The Only Energy Stock You'll Ever Need." In it, Fool analysts detail a company that will also benefit from the natural gas boom and pays a dividend. Click here to grab a copy.

Dan Dzombak can be found on his twitter account: @DanDzombak. The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Chevron. Motley Fool newsletter services have recommended writing puts in Southwestern Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (64)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2011, at 2:40 PM, showmethefacts wrote:

    There is a lack of analysis here. You state "

    U.S. natural gas production has risen roughly 25% over the past five years, to 78 billion cubic feet per day. Experts expect production to keep rising over the next 25 years, to 113 Bcfd by 2035.

    Then, you go on to say the price if natural gas should rise over the next few years. Why? Doesn't increased production mean more supply? Natural gas is moved to users via pipelines; it cannot be easily exported (LNG has not made a dent in the glut) or moved around on tankers like oil can. The truth is that we have a domestic glut of natural gas now, the result of new drilling techniques that have unlocked previously uneconomic supplies. Industry, utilities and transportation have NOT switched from coal (cheap and dirty, but politically protected for now) or oil fast enough to sop up the expanding supply. While I agree with Boone Pickens and others, including some strange bedfellows like environmentalists who see natural gas as a cleaner alternative to other fuels, that more US users SHOULD switch to gas, the fact is that they have not. We don't know when or if they will. The gridlock in Washington means issues like this are way down the list... and coal has a strong lobby on both sides of our kleptocracy... This article may be right in the long run, but is very short on analysis of why greater supplies make these stocks a good deal. If even more gas floods the market, prices could fall further (making it uneconomic to drill and produce). Lower or even stagnant commodity price is not good news for any of the stocks mentioned. And besides, the real low-cost producer (at well below than $3 mcf) is Ultra Petroleum (UPL), which is mostly a gas producer despite its name. SWN has higher costs and some negatives that UPL does not have. UPL is also at a bottom (but could stay low if the glut continues)

  • Report this Comment On September 16, 2011, at 1:10 PM, JSMBAPhD wrote:

    Agree with showmethefacts.

    The article poster Dan D link lists Ultra as the low-cost producer, yet Dan urges buying Southwestern because of its low production costs.

    If a column contradicts its own sources, the column has not been well thought through.

  • Report this Comment On September 16, 2011, at 2:52 PM, asdfk123 wrote:

    I would agree natural gas is the future alternative to electricity production in the US. Natural gas is cleaner and economical.

    From a global perspective, I still think coal has a big role to play. And, frankly, because of the gridlock in Washington, it might have a big role in the United States for some time.

    I would also be cautious of sole Natural Gas plays. I think this is a long-term trend and an investor might benefit more with a diversified player like Exxon or BP that will add more natural gas to their energy portfolio over time.

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