5 Natural Gas Underdogs

It's hard keeping track of all the oil and gas companies out there. Some of them are doomed, some are on the brink of greatness, and still others were once doomed and are poised for a comeback. These small companies may succeed on their own, but the oil and gas industry is also rife with mergers and acquisitions right now. While it's tough to speculate who will buy what and when, it never hurts to familiarize yourself with smaller companies. Below are five energy stocks that rarely make it into your water cooler conversation, but are worth knowing about.

Gastar Exploration (AMEX: GST  )
Gastar is the Marcellus shale underdog, targeting most of its $134.2 million capital expenditure budget at its 99,300 gross acres there.

2011 was not kind to Gastar stock; it fell nearly 30% over the course of the year. The company has a plan for fighting its way out of that hole though, targeting 12%-16% liquids production and a rate of 26 MMcfe to 28 MMcfe in the first quarter of this year.

Gastar also plans to start mid-continent oil operations during the second half of this year. An emphasis on liquids should bode well for the company in 2012.

Magnum Hunter Resources (NYSE: MHR  )
Magnum Hunter Resources is an example of a company turning the corner. The stock spent much of 2011 in decline, only to reverse course in November, climbing slowly but steadily since then. A crucial component to the future success of this company is its reserve mix that consists of a 48% crude and NGLs to natural gas ratio.

It has set a target 2012 exit rate of 15,000 barrels of oil equivalent per day. For perspective, the company's average daily rate right now is 13,000 BOE/d.

But perhaps the most crucial component of its strategy for the future was the investment in its Eureka Hunter Pipeline system. Midstream infrastructure is increasingly important, and MHR managed to develop its system at a lower cost than the industry average.

McMoRan Exploration (NYSE: MMR  )
Most people have never heard of McMoRan, but sure enough, it's the 37th largest producer of U.S. natural gas, ahead of the very recognizable energy giant Hess.

The company's future hopes are pinned to a well that bears a more familiar name: Davy Jones. While McMoRan's track record has yet to turn many investors into daydream believers, the well is evidence that the company is intent on finding success in ultra-deep water. Prior to Davy Jones, McMoRan focused on shallow water drilling, at depths where its wells could only guarantee reserves for four years -- if that.

Fool Isac Simon is bullish on McMoRan's future. If it is successful, the Davy Jones well will produce mostly natural gas, but it will boost the company's production numbers significantly and lead the way for more well development in the area. McMoRan is also exploring other deep shelf prospects and is worth keeping an eye on.

Stone Energy (NYSE: SGY  )
Stone Energy is also one of the top 40 producers of U.S. natural gas, No. 39 to be exact. Though the company is a major producer of natural gas, oil makes up 42% of all reserves and 59% of its proved producing reserves. Stone's gas comes from the booming Appalachian region; its oil from crucial assets is located offshore in the Gulf of Mexico, and onshore ranges from Alberta's Bakken down to the Eagle Ford shale in Texas.

These prime assets are behind what could be a big year for Stone. The company anticipates a 12% to 29% increase in production, more than doubling production from its assets in the Appalachian region to more than 50 MMcf per day. Production for the year is expected to be split 50/50 between oil and gas on a BTU equivalent basis.

Hyperdynamics (NYSE: HDY  )
2012 has gotten off to a rough start for this Houston-based company that is in the process of drilling a well off the shore of Guinea. Drilling costs came in higher than expected, and that reality has "adversely affected" the company's cash position and liquidity. Even worse than that, the company has acknowledged that there may be additional delays that could further hammer away at its bottom line.

The company has issued more stock to fund ongoing drilling costs. Second-quarter results are scheduled to come out today, and they'll hopefully give investors a clearer picture of Hyperdynamics' future.

Foolish takeaway
These stocks may blow up in a merger or fade away into oblivion -- therein lies the exciting mix of risk and reward in the little known, smaller energy companies. For a less-risky play outside the energy arena, interested investors should check out another under-the-radar stock our analysts have picked as The Motley Fool's top stock for 2012.

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter @TMFDuffy.

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.


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