Which Natural Gas Stocks Should You Consider?

What are the best natural gas stocks out there in the market today? With the rising popularity of natural gas as a prime energy source – especially with the still-young alternative energy market – that’s a very good question, one that many investors are trying to answer.

Natural gas would be the ideal fossil fuel if it weren’t limited and finite. It is far cleaner than any other fossil fuel; it is more plentiful; it is more versatile; and it produces less carbon dioxide than coal or oil. That doesn’t mean natural gas is a perfect energy source, because it isn’t and has its flaws. The positive features of natural gas relative to other fossil fuels, though, means natural gas is very attractive to investors.

Here, we’ll talk about finding some of the best natural gas stocks to buy. We’ll also cover why natural gas is in demand and what the market looks like – and could look like in the future.

The Basics of Natural Gas

Natural gas is used in a variety of industries and services. In the United States, 30.5% is used to generate electricity; 20.5% is utilized in the home (primarily to heat, cool and cook); 32.9% is used in industry; 13.3% is used in commercial businesses, and 2.8% is used in transportation.

A lot of different materials have natural gas play a role in their manufacture. These include fertilizer, plastic, detergent, synthetic materials like nylon, ink, paint, and other various products.

The largest holder of natural gas in the world is Russia, with an estimated 18.3% of proven natural gas reserves. Iran is second, with 11.1%; Turkmenistan is third with 8.73%, and Qatar and the United States round out the top five, with 8.5% and 2.55%, respectively. At current rates of use, there is roughly a century of recoverable natural gas. Russia alone could provide natural gas for the world for 18 years.

Largely due to leaps in technology concerning natural gas production and recovery (and partially due to a global recession), the price of natural gas has fallen significantly over the past decade. The average annual wellhead (i.e. lowest) price per thousand cubic feet in the United States peaked at just over $8 before falling to less than $4 in 2010. The wellhead price for June, 2012 was $2.54 in the U.S.

As you can imagine, this price drop significantly hurt natural gas stocks, but provides investors with a future opportunity to take in profit once the industry recovers.

Natural Gas Producers and Suppliers

We’ll now look at natural gas stocks, starting with the companies that produce and supply the fuel.

Chesapeake Energy (CHK)

Chesapeake Energy is the second-largest producer of natural gas in the United States, behind only oil giant Exxon Mobil. This company owns interests in roughly 38,900 gas wells across 15 states and has an estimated 14.3 trillion cubic feet of gas reserves. The stocks’ price has fallen significantly over the past year from 31.82 on September 11, 2011 to 19.57 on September 10, 2012.

Devon Energy (DVN)

A competitor to Chesapeake, Devon Energy is a Fortune 500 oil & gas producer headquartered in Oklahoma City, Oklahoma. The company reported $11.4 billion in revenue in 2011 with net income of $4.7 billion and total assets worth $41.1 billion. The stock’s current market cap is $24 billion at 59.37 per share, which is below its 52-week high of 76.34 per share. What makes DVN attractive is the stock’s low P/E ratio of 9.96 and its high institutional ownership rate of 77%.

LINN Energy (LINE)

Linn Energy is a producer of natural gas and oil that invests heavily in growth and expansion. The company has 5.1 trillion cubic feet of natural gas reserves and recently purchased three property packages for a total of $4.7 billion. Right now, the stock has a P/E of 8.27 at 39.61 per share, which is only down slightly from its 52-week high of 40.80. What is most impressive about this stock is its high dividend yield of 7.32%, meaning it is a great play for income stock investors.

Natural Gas Services

In addition to companies that supply natural gas, there are companies that service natural gas. We’ll look at two in particular that could be good plays.

Kinder Morgan (KMI)

Kinder Morgan is the owner of subsidiary companies that control natural gas pipelines and terminals. The company operates or owns roughly 65,000 miles of pipeline throughout North America after its successful acquisition of El Paso Corporation in May, 2012. The stock’s P/E is monstrous at 61.77, but it does have a 3.91% dividend yield and has fallen somewhat from its 52-week high of 40.25 (as of September 10, 2012, the price is 35.76 per share). The company is attractive because it is the single-largest owner of natural gas pipelines on the continent.

Enterprise Products Partners (EPD)

Enterprise Products is also a natural gas pipeline company, but it also is heavily involved in servicing natural gas producers, storing natural gas, and processing it. This company’s integrated profile is attractive to investors who want a wider exposure to the natural gas industry. Its P/E ratio is 19.39, with a dividend yield of 4.78% and EPS of 2.74. The stock’s price has steadily increased over the past year, peaking at 54.98 before falling eventually to 53.11 as of September 10, 2012. EPD and KMI are competitors, although EPD is more integrated.

The above stocks should be a good start to finding natural gas plays in the market that work for you.

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