The price of natural gas has been heading higher over the past month. An early start to winter and a forecast that it will be a rough one this year has traders bidding up the price of gas. That's good for natural gas producers as higher prices typically lead to higher profits. That said, not all natural gas producers will excel in 2014, especially if prices don't continue to head higher.
The best natural gas stocks over the past couple of years have been those that produce gas at the lowest cost. The best place in America to do that is the Marcellus Shale. On the other hand, those natural gas companies without top positions in the Marcellus could struggle if gas prices take a breather. That puts Southwestern Energy (NYSE:SWN), Ultra Petroleum (NASDAQ:UPL) and Quicksilver Resources (NASDAQOTH:KWKAQ) at the greatest risk to struggle in 2014.
Great position, wrong play
Southwestern Energy is the fifth-largest natural gas producer in the U.S. Lower 48. The core of its operations is its top position in the Fayetteville Shale. It's a good play, but not as profitable to drill as the Marcellus Shale. That's one reason why Southwestern Energy is investing just enough capital next year to keep its Fayetteville Shale production flat. Instead, the company is using the Marcellus Shale to fuel overall production growth of 14%.
That said, more than half of Southwestern's 2014 production will still come from the Fayetteville. Meanwhile, its Marcellus production still won't be as profitable as peers like Cabot Oil & Gas (NYSE:COG) which can earn triple-digit internal rates of return on each well it drills. Cabot simply has one of the best positions in the Marcellus. Southwestern Energy could have a tougher time next year, especially if natural gas prices head back below $4 .
Hoping for help from oil
Ultra Petroleum is a lot like Southwestern Energy. It has a solid core position in Wyoming and an OK spot in the Marcellus. Because of this, the company recently added some oil-rich assets to help grow profits in the years ahead as it waits for gas prices to recover.
Not only is Ultra Petroleum hoping for help from oil, but it has really shifted its focus from overall growth to profitable growth. Part of that switch saw the company slash more than $1 billion from its capital budget from just two years ago. Ultra now only invests on wells that will earn an internal rate of return above 20%. While that's a fine rate, it's nowhere near the triple-digit returns that companies like Cabot Oil & Gas can get to drill for natural gas. That makes Ultra Petroleum another company that could have a tough year if natural gas prices struggle in 2014.
Gas strong but finances weak
Quicksilver Resources has a natural gas-heavy portfolio, with gas making up 76% of its current resource mix. This comes from its strong position in the Barnett Shale, as well as in Canada. It also has some emerging positions in Colorado and Texas. What it doesn't have is much capital to develop these resources, as low natural gas prices have hit the company hard.
Quicksilver has substantial natural gas upside and it has been increasing its financial flexibility through joint ventures and asset sales. But it doesn't have the super high-returning wells that its Marcellus-based peers enjoy, nor does it posses a top-notch balance sheet to winter another plunge in prices. That's why 2014 could be a rough year for the company if gas prices were to take another plunge.
Ultra Petroleum and Southwestern Energy are working on using the Marcellus to fuel future growth, while Quicksilver is looking at other growth opportunities. All three have a long way to go, meaning 2014 returns will be more dependent on natural gas prices. Bottom line, I think there are better ways to play America's energy boom than these three stocks.
Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum and has the following options: long January 2014 $30 calls on Ultra Petroleum, long January 2014 $40 calls on Ultra Petroleum, and long January 2014 $50 calls on Ultra Petroleum. 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.