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.
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:
Q2 U.S. Nat Gas Production (MMcf/day)
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.
Total Production (MMcfe/day)
U.S. Nat Gas as % of Total Production
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.
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
Foolish bottom line
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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.