The prolonged cold snap in the U.S. has pushed natural gas prices toward multi-year highs around $4.40/btu. At the same time, most of the domestic exploration and production firms sit below the highs from back in 2011 when the S&P 500 was at considerably lower levels. The combination could present a buying opportunity for the domestic natural gas producers including Chesapeake Energy (NYSE:CHK), SandRidge Energy (NYSE:SD), and WPX Energy (NYSE:WPX) to name a few that are intriguing.
Most of these companies have made a push into oily regions, but the major reason for prolonged weakness in the stocks has been high concentration of assets and production in the dry gas regions. With oil near $100 per barrel and the latest weekly natural gas report from EIA showing inventory levels 3% below the 5-year average levels, any production could be very profitable in the future. Especially with the natural gas inventory number a substantial 7.2% below the levels of last year.
It is still too early to tell if a new trend is forming, but investors need to remember that future prices of natural gas aren't supportive of prices remaining this high. These firms face tough decisions as to whether to drill more wells for a market that isn't supporting higher prices by the time the wells hit production. This lack of conviction in the futures market could limit drilling and eventually lead to higher prices.
Chesapeake Energy owns top positions in just about every major shale, yet the stock struggled due to the massive debt the company incurred to secure those lease positions. The company continues to focus on oil production growth, but for the last quarter it only amounted to 18% of total production, up from 14% in the prior year. Natural gas remained at 73% of total production, but the realized revenue dropped to only 35%. For the third quarter, the average daily production consisted of approximately 3.0 bcf of natural gas, 120,00 bbls of oil and 58,500 bbls of natural gas liquids.
Chesapeake provides a prime example of how the company is still focused on natural gas production, but it isn't realizing the benefits due to the previously low prices. The wide price discrepancy in the energy sources is shielding the potential for substantial gains if natural gas prices were to rise significantly.
Struggling to evolve
Similar to Chesapeake Energy, SandRidge Energy fired the CEO that created the firm in order to focus on improving operational efficiency and moving away from aggressive exploration and land deals. The company is now heavily focused on the Mississippian Lime formation, but it also has assets in the Gulf of Mexico.
During the third quarter, the company produced 89.6 mboed with natural gas production at roughly 52% of total production. Naturally revenue from oil was substantially higher than natural gas due to the large price differential. SandRidge expects to ramp up rig counts in the Mississippi Lime to grow production by approximately 35% in 2014. The formation is averaging 52% natural gas, providing a massive benefit if the associated prices increase.
Developing a beast
WPX Energy has struggled like the other two stocks over the last few years due to low natural gas prices. The company has attempted to shift toward oil production, but the roots of the company has it back developing a massive natural gas find in the Niobrara.
Oil production is up significantly due to the move into the Bakken Shale, but the success of the initial two wells in the Niobrara plus Piceance Basin acres and Marcellus Shale potential places natural gas back at the forefront. While Bakken oil production was up 46% versus the third quarter last year, the majority of production still comes from natural gas. The average daily natural gas production of 1,012 MMcf swamps oil production at 22.2 Mbbl/d. Oil production only generated slightly over $183 million in quarterly revenue, or 37% of the $492 million for quarterly product revenues. The significant production from natural gas and the potential growth in the Niobrara and Marcellus provide plenty of upside from not only higher natural gas prices, but also production growth.
While Chesapeake Energy, SandRidge Energy, and WPX Energy have all attempted to shift production growth toward oil, all three are still primarily focused on natural gas. A sharp rise in natural gas prices would benefit these stocks to a great extent. All three companies have substantial debt positions that comprise a large portion of enterprise value, making an increase in revenue important to overcome any leverage concerns and pay for future capital spending plans.
Mark Holder 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.