Please ensure Javascript is enabled for purposes of website accessibility

3 Regions Where Natural Gas Production Is Growing

By Matthew DiLallo - Apr 10, 2013 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While many companies have stopped investing in order to grow natural gas production, that hasn't stopped overall production growth. Three regions are seeing quite the natural gas boom.

If you haven't noticed yet, natural gas prices have started to head higher. A combination of factors, including a surprisingly cold March, have led to resilient demand. As prices have inched up, two top Wall Street banks have seen enough momentum to raise their 2013 price target for natural gas. Morgan Stanley's price forecast was bumped up by 7% to $3.93 per million British thermal units, or MMBtu, while Goldman Sachs raised its forecast from $3.75 per MMBtu all the way to $4.40 per MMBtu.

That's good news for those companies in regions where natural gas production is actually growing. Overall since the end of 2011, North American dry shale gas production has risen by 9.95% to 27.2 billion cubic feet of production per day as of the beginning of this past February. This rise has been driven primarily by production growth at three big plays. Let's take a look.

Eagle Ford
While not known for natural gas, the Eagle Ford Shale has actually seen a 43.12% pop in natural gas production according to data from the Energy Information Administration, or EIA, over the past year. Most of this gas is associated with oil and liquids, as fewer companies are drilling in the dry gas window at the moment.

For example, Chesapeake Energy's (CHKA.Q) core acreage is in the sweet spot of the oil window. Despite that, 19% of the company's fourth-quarter production was natural gas. As Chesapeake increases its overall production, natural gas production increases as a byproduct of its liquids-focused drilling. Further, as the nation's No. 2 gas producer, Chesapeake is one of the biggest beneficiaries of higher gas prices.

According to the EIA, natural gas production out of the Marcellus jumped 55.28% over the past year. Top producer, Range Resources (RRC -0.85%), produced a total of 146 Bcf of natural gas last year. That production easily exceeded that of number two producer EQT's (EQT 1.44%) 103 Bcf of natural gas production last year.

These two companies hold one thing in common: Both are among the lowest-cost producers of natural gas in the country, which gives them a competitive advantage to make money when most of their competitors cannot. Investors in these low-cost producers have been served well as both have returned around 40% over the past year. 

While the Bakken is known for its oil, natural gas production skyrocketed by 94.38% according to data from the EIA. Part of the reason more gas is being produced is because less of it is being flared -- instead, it's being put into pipelines. Most of this infrastructure simply didn't exist until recently and now that companies have a way to get gas to market, they're able to sell instead of flare.

The impact of this reduced flaring is clearly evident at Kodiak Oil & Gas (NYSE: KOG). In 2011 the company produced 1,329 MMcf of gas, but flared 807 MMcf. That's 61% of the gas! Last year the company produced 6,613 MMcf of natural gas and while it flared 3,311 MMcf, down to 50% of what was produced. Meanwhile, the overall amount of gas that hit the market jumped a staggering 533%.

Kodiak isn't the only company growing its associated gas production. Over the past two years, Continental Resources (CLR -2.72%) has grown its overall production faster than its peers, so that it's now the top producer in the play. While its production is heavily weighted toward oil, which accounted for 72% of production, it's still growing natural gas production as a byproduct of its oil growth.

The Foolish bottom line
There's one main theme that runs throughout: Companies will produce more natural gas if it's profitable to do so. For some, that's being the low-cost producer giving them the ability to profit when others cannot. For the rest, natural gas production growth happens naturally because of its associated with more profitable oil and natural gas liquids. Given the economics of these regions, its not surprising to see this increase in natural gas production. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
Continental Resources, Inc. Stock Quote
Continental Resources, Inc.
$61.52 (-2.72%) $-1.72
Range Resources Corporation Stock Quote
Range Resources Corporation
$28.99 (-0.85%) $0.25
EQT Corporation Stock Quote
EQT Corporation
$45.12 (1.44%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.