Playing the Nat Gas Juggernaut

Chevron's

(CVX) - Get Report

buying of

Atlas Energy

(ATLS)

Tuesday for a 37% premium is just another example of the consolidation trend in natural gas that I have been writing consistently about for the last year and a half. This is a train that has been leaving the station for a while and you need to be on it. So the question is obvious: Who is the next Atlas and how can you best position yourself for the oncoming natural gas juggernaut?

Natural gas will undoubtedly be a key component of our energy future, after all it's cheap, plentiful, entirely domestic and far greener than crude oil and its refined products. Washington recently hasn't been a strong advocate for incentives for the fuel, a situation I think is about to change with Republican control of the House of Representatives. The commodity itself has had a miserable year, down more than 30% while virtually every other commodity, from oils to grains, are up double digits and more.

Video: Speculative Natural Gas Stocks >>

These fundamental weaknesses have together spelled "value" to big money buyers of nat gas assets like Chevron, which are willing to pay a monster premium while the fuel and these assets are relatively cheap before the inevitable run that natural gas has historically proven it can make with only the slightest prodding.

So how do you play this continuing trend in natural gas and who will be the next possible Atlas?

The first and obvious method is to center in on the best-run dedicated natural gas companies you can find. Here you won't be looking at a takeover target that can net you a 37% profit overnight, but you will be in the best position to benefit from rising demand and a rising commodity price, which I am predicting will increase from around $4/mMbtu to close to $7/mMbtu sometime in 2011.

For those of you who regularly follow my writings, the three nat gas companies I'm about to give you will sound like a broken record:

Devon

(DVN) - Get Report

,

EOG Resources

(EOG) - Get Report

and

Cimarex

(XEC) - Get Report

.

The

far more speculative way to play the trend

is to try and find the "next Atlas," the next small nat gas company to entertain a buyout offer from a very big and rich integrated oil company. This has never been my game and I give you some ideas only -- although some of these names have been in my portfolio at various times I've never bought them with "buyout" in mind.

But I know how deep the itch can be to hold speculative stocks in a consolidating sector, looking for quick gains from a buyout that would otherwise take months or even years to otherwise accumulate. What I'm not going to give you are the most obvious ideas -- the companies in the exact same mold of Atlas energy with mostly Marcellus shale assets and about a $5 billion to $7 billion market cap. These candidates, such as

EQT

(EQT) - Get Report

,

Cabot Oil and Gas

(COG) - Get Report

and

Range Resources

(RRC) - Get Report

have had monster sympathetic spikes off the Atlas deal and I think are to be avoided.

Instead, I give you three other ideas --

Newfield Exploration

(NFX)

and

Linn Energy

(LINE)

, both with assets in the Anadarko basin, and I will again throw Cimarex out there, with assets in what I think will turn out to be one of the best shale plays -- the Oklahoma Cana region.

These are stocks that even a non-player of buyout targets is more comfortable in suggesting because I believe strongly in the natural gas story. Whether or not a big integrated comes in to sweep them up, they are worthy natural gas-levered investments in and of themselves.

So the train continues to chug out of the station. Natural gas seems to be the only remaining commodity that's remained cheap and so are its associated stocks. The only question is whether you will be on the train before it picks up too much steam and passes you by.

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At the time of publication, Dicker was long Devon, Linn Energy and Cimarex, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.