America is sitting on 2,203 trillion cubic feet of technically recoverable natural gas. That's enough to last the country about 92 years. Thanks to shale gas America is now the top natural gas producer in the entire world. Soon, America will start supplying the world with this resource as the country is about to begin exporting its excess natural gas, and by 2040 18% of all natural gas produced in the U.S. could be headed elsewhere for consumption, as the following chart projects.
The growth in natural gas consumption both in the U.S. and abroad will fuel profits for natural gas stocks for years to come. However, the best stocks to invest in are those loaded with the lowest cost natural gas growth. Topping that list are EQT Corporation (NYSE:EQT), Cabot Oil & Gas Corporation (NYSE:COG), and Range Resources Corp (NYSE:RRC). Here's why.
Lowest cost yields higher profit margins
Over the past three years the trio of EQT, Cabot Oil & Gas, and Range Resources have led the pack in both lowest lifting cost and lowest finding and development cost, as noted on the following chart.
All three companies have ultra-low lifting costs of around $0.50 per Mcfe of natural gas. That's almost half the cost of the fourth lowest cost producer Southwestern Energy Company (NYSE:SWN) and well above other producers. Likewise, the trio's F&D cost per Mcfe is around $0.75, again nearly half the cost of the fourth place Southwestern Energy and light years better than most other peers.
Given that natural gas is a commodity business, the companies with the lowest costs will typically have the highest profit margins. This suggests that as natural gas consumption and prices increase EQT, Cabot Oil & Gas, and Range Resources will be among the most profitable natural gas producers in the country.
Loaded with resources
However, having low cost production is only half of the story here. What makes EQT, Cabot Oil & Gas, and Range Resources among the best stocks to invest in is the fact that all three companies are simply loaded with natural gas resource potential. Range Resources, for example, currently estimates that its total resource potential is upwards of 86 trillion cubic feet of natural gas, as noted on the following slide.
Not only is that enough natural gas to meet the needs of 86 million households for 15 years, it doesn't even include the company's resource potential in the Utica/Point Pleasant shale. Given that the Utica Shale is starting to look extraordinary it would suggest that Range Resources has even more natural gas potential that is still to be discovered.
Likewise, Cabot Oil & Gas is loaded with natural gas growth opportunities. The company currently estimates that it has a 25 year drilling inventory in the most profitable spot within the Marcellus shale. It's a position that's currently earning the company internal rates of returns as high as 206% at a $4 natural gas price.
Higher natural gas prices, along with improved well costs, will only enhance Cabot Oil & Gas' rates of return in the years ahead.
EQT is also just loaded with natural gas potential. Currently the company estimates that its total resource potential sits at 44 trillion cubic feet equivalent of natural gas.
Given its low cost structure, the company can earn a very strong internal rate of return as it drills and produces these resources. While its returns aren't quite as high as Cabot's, the company can still earn a very strong return of 59% across its Marcellus shale development areas. That return, however, balloons to 110% if natural gas prices hit $5, which isn't such a stretch given that consumption and exports should take gas prices higher in the future.
The best natural gas stocks to invest in are those with the lowest cost basis and vast untapped natural gas resources. That's why Range Resources, EQT, and Cabot Oil & Gas top the list of best stocks to invest in -- their cost basis is half of their closest peers, and all three are sitting on trillions upon trillions of cubic feet of natural gas resource potential.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Range Resources. 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.