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The 3 Best-of-Breed Natural-Gas Stocks

By Matthew DiLallo - Aug 18, 2015 at 3:02PM

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The numbers don’t lie: Antero Resources Corp., Range Resources Corp., and Southwestern Energy Company are the three best-of-breed natural-gas stocks.

The natural-gas sector is going through a rough patch. Like oil, its price has been under pressure due to surging supplies, which have been more than enough to meet demand. That said, the future for natural gas appears to be much brighter than its recent past as new demand for the cleaner-burning fuel is on the way. That increased demand, expected to come from petrochemical plants and LNG facilities along the U.S. Gulf Coast, should send natural-gas prices higher. While that rising tide should lift all boats, the best way to invest in this natural-gas megatrend is to stick with best-of-breed producers Antero Resources ( AR 1.06% ), Range Resources ( RRC 0.86% ), and Southwestern Energy ( SWN 5.16% ).

Best resource
The foundation of an energy company is its resources base, with the best foundation being built upon a low-cost resources base. This is where Antero Resources, Range Resources, and Southwestern Energy all shine. As the following slide notes, all three have low-cost operations that are below the peer average.

Source: EQT Corporation Investor Presentation. 

While these are not the three absolute lowest-cost players, they are still among the top tier. The reason for this is due to that fact that all three operate in the best spots of the Marcellus and Utica shale plays, which not only keeps costs low but drives strong returns and growth opportunities.

Best growth
Speaking of growth, that's another area where this trio really shines. They are three of only five large-cap oil-and-gas producers that expect to deliver production growth of 20%, or higher, in 2015 as noted on the following slide.

Source: Antero Resources. 

As that slide notes, Antero Resources is the fastest-growing large-cap energy stock as it is expected to deliver more than 40% production growth in 2015. Meanwhile, Southwestern Energy is expecting the third-fastest production growth at 24.3% and Range Resources is fifth best at 20%.

Best returns
While having great low-cost assets that drive strong growth is a solid foundation, what really puts these three at the top of the best-of-breed list are their overall returns. As the chart below shows, the three have delivered return on equity, return on capital invested, and return on capital employed of 10% or more in 2015.

AR Return on Equity (TTM) Chart

AR Return on Equity (TTM) data by YCharts.

It's worth noting that Antero Resources is expected to deliver the best returns of the trio. Given its robust returns, it's no wonder why the company is expected to deliver peer-leading growth in 2015.

Overall, the returns of the trio are well ahead of their natural-gas-producing peers. That's clear when comparing their returns to the returns of their peers on this next chart.

CHK Return on Equity (TTM) Chart

CHK Return on Equity (TTM) data by YCharts.

As that chart shows, the next five best peers all are expected to deliver returns on equity, capital invested, and capital employed of less than 10% in 2015.

Investor takeaway
The best natural-gas stocks have three things in common. They have the best resources, the best growth potential, and the best returns. The three natural-gas stocks with the combination of all three are Antero Resources, Range Resources, and Southwestern Energy, which makes them the best-of-breed natural-gas stocks for long-term investors to consider buying. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

CONSOL Energy Inc. Stock Quote
CONSOL Energy Inc.
$14.27 (2.59%) $0.36
Range Resources Corporation Stock Quote
Range Resources Corporation
$18.85 (0.86%) $0.16
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
Cabot Oil & Gas Corporation Stock Quote
Cabot Oil & Gas Corporation
$20.75 (3.13%) $0.63
Southwestern Energy Company Stock Quote
Southwestern Energy Company
$5.30 (5.16%) $0.26
Antero Resources Corporation Stock Quote
Antero Resources Corporation
$17.22 (1.06%) $0.18

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

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