1 Rock-Solid Natural Gas Stock

If you believe – as I do – that natural gas prices are heading much higher over the next three to five years, then at least a handful of natural gas companies should stand out as bargains right now. One such company is Southwestern Energy (NYSE: SWN  ) , a well-managed, low-cost, natural gas producer with operations focused mainly in the Marcellus and Fayetteville shales. Let's take a closer look at why the company might be a good investment right now.

Low costs and strong growth
Houston-based Southwestern Energy is about as close as you can come to a pure-play natural gas producer. As a result, the company's share price closely tracks the price of gas, which has seen a general upward trend since mid-2012. Not surprisingly, Southwestern shares are up nearly 50% since bottoming out in June last year.

Southwestern's advantage over other gas producers is its extremely low cost of production and a disciplined management team focused on organic growth through the drillbit. The company, which boasts 4 trillion cubic feet of reserves, has delivered consistent growth in both production and reserves over the past five years, which have grown by an annual average of 38% and 23%, respectively.  

Along with competitor Ultra Petroleum (NYSE: UPL  ) , which had one of the lowest all-in costs per Mcfe in the industry last year, Southwestern also boasts one of industry's most appealing cost structures, with all-in cash operating costs coming in at $1.18 per Mcfe in the first quarter, down from $1.28 per Mcfe in the year-ago quarter. That means Southwestern can drill profitably even when the vast majority of gas producers are taking losses on gas drilling.

Strong prospects in the Marcellus
For the remainder of the year, the company's capital spending will remain heavily weighted toward low-risk developmental drilling, mainly in the Fayetteville and Marcellus shales – two of the lowest-cost shale gas plays in the country. The Marcellus should be an especially promising source of future growth for the company.

Though Southwestern got off to a slower than anticipated start in the play due to logistical hurdles earlier in the quarter, it ended the quarter strong and is back on track to grow its production, hoping to surpass 500 MMcf of natural gas per day by the end of the year.  

Recent asset purchase from Chesapeake
Southwestern also recently increased its position in the Marcellus to a whopping 337,000 net acres when it acquired 162,000 net acres in the Pennsylvania portion of the play from Chesapeake Energy (NYSE: CHK  ) , an energy producer that's currently divesting non-core assets to raise much-needed cash. From Southwestern's perspective, the terms of the agreement were quite attractive.

Not only did Southwestern pay Chesapeake a relatively paltry $93 million for the acreage – well below comparable transactions in the play over the past couple of years – the acquired assets were producing properties positioned near the company's existing acreage. The purchase should also help support the company's target of double-digit growth in both production and reserves, with CEO Steve Mueller even commentating that it could help double the company's current production and reserve growth.  

Final thoughts
For investors bullish on natural gas prices over the next five years, Southwestern stands out as a lucrative investment opportunity. In addition to a disciplined management team focused on value realization, Southwestern boasts a strong balance sheet and a relatively low debt to book capitalization ratio of 36%. As it focuses its $2 billion capital investment program on the Marcellus and Fayettville shales, production is expected to grow by 13% this year.

Another company that stands to benefit big time from the longer-term recovery in natural gas prices is Chesapeake Energy, the nation's second-largest gas producer. Though it has allocated the majority of its capital this year toward drilling in liquids-rich plays, natural gas still makes up more than three-quarters of its production mix. Will Chesapeake be able to ramp up oil production and survive until natural gas prices finally recover? Or will it languish under the weight of its heavy debt load? To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy and, as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.


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