After spending several years at depressed levels, natural gas prices are on the move. Natural gas is now above $4 for the first time since June, representing a six-month high. It appears that rising demand, thanks to increased adoption by utilities and other end users, is finally catching up to the supply glut that resulted from the boom in natural gas production.
Rising natural gas prices makes industry giant Chesapeake Energy (NYSE:CHK) an obvious winner. Meanwhile, other companies including ExxonMobil (NYSE:XOM) and even coal producers like Peabody Energy (NYSE:BTU) stand to benefit. Here's why rising natural gas prices will have a beneficial impact on all three of these companies.
It's about time
Not surprisingly, Chesapeake Energy will reap massive rewards from rallying natural gas prices. After all, Chesapeake is the second-largest producer of natural gas in the United States. The company is already performing strongly so far this year. Third-quarter operating cash flow rose 22% year over year, thanks in large part to 31% production growth of natural gas liquids.
Specifically, the company's Utica and Marcellus shale plays represent its key areas. Production at Utica and Marcellus increased 91% and 53%, respectively, in the third quarter versus the same period last year. Going forward, continued increases in natural gas and natural gas liquids production will provide a powerful tailwind as the company realizes higher prices as well.
Is the future finally now?
ExxonMobil dove head-first into natural gas when it purchased XTO Energy in 2010 for a staggering $41 billion. Unfortunately, natural gas prices collapsed soon after, making the company seem foolish for spending such a huge amount just before prices fell dramatically. Now that prices are reversing, ExxonMobil may finally begin to see its massive investment pay off.
That's because the acquisition made ExxonMobil the nation's largest holder of natural gas reserves. XTO's operations in the Piceance Basin are particularly exciting. ExxonMobil, through its ownership of XTO, now has an interest in approximately 300,000 acres there. ExxonMobil's leases hold a potential recoverable total of more than 45 trillion cubic feet of natural gas over the expected life of the Piceance Basin. For those keeping score, that's enough natural gas to power 50 million homes for almost a decade.
Believe it or not, coal might be in the early stages of a comeback
While natural gas prices languished, coal demand sank. Coal end-users including utilities began switching to natural gas, and not surprisingly, the financial results of coal producers like Peabody Energy suffered mightily. Rising natural gas prices would finally present a welcome relief for Peabody, which couldn't come at a better time.
Coal companies across the board have been beaten down by cheap natural gas. Now that natural gas prices are heading higher, this trend may finally reverse. It's likely that if the rally in natural gas continues, end users would once again be incentivized to return to using coal.
That would mean an improved outlook for Peabody Energy, which desperately needs any bit of good news it can get its hands on. Peabody's adjusted earnings per share are down a staggering 82% through the first nine months of the year. Peabody has actually increased year-to-date sales volumes by two million tons, but collapsing prices have blown a massive hole in its profits.
Three winners from rising natural gas prices
Natural gas prices are on the rise, which of course means improved financial results for the usual industry suspects like Chesapeake Energy. Investors should keep ExxonMobil in mind as well, which has struggled throughout 2013 but would be a sure-fire winner from rising natural gas prices. That's due to its massive acquisition of XTO Energy, whose huge natural gas operations would finally start to pay off. And, a sneaky natural gas play exists in the form of coal producers like Peabody Energy, which could see greater coal demand from its end-users. As a result, investors should keep all three of these companies in mind if natural gas prices continue to rally.
Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.