|Stockpickr Answers What's the best pure natural gas play?|
Natural gas is the natural investment opportunity right now, as the shopping spree for natural gas companies continued last week with the recent buyout offer of a subsidiary of Royal Dutch Shell ( RDS.A) and PetroChina ( PTR) for Arrow Energy's ( AOE) Australian operations. Positioning yourself correctly on this no-brainer fuel of the future holds the key to a profitable energy portion of your portfolio going forward, and I'm going to show you how to do it. Natural gas has everything fundamentally going for it right now. It is cheap, it is domestic and it is plentiful. It has so far been less affected by what I've called the "endless bid" in energy, where capital from institutional and individual investors is propping up prices, as with crude oil. So while crude hovers above $80 a barrel, natural gas still trades at under $4.50 per mmbtu. That's an incredible 18-to-1 ratio, well over the more historically traditional six-to-10 times differential. So we know that natty is cheap. With recently discovered Marcellus and Texas shale deposits and new injection technologies to get at them, the U.S. has become the "Saudi Arabia of natural gas," with well over 100 years of new supply now waiting to be tapped. So we know it is plentiful and domestic. So, even if Washington has been slow to recognize natural gas as the cornerstone of a new national energy plan, corporate America has been far less slow to recognize the obvious. Exxon Mobil ( XOM) was first, paying $41 billion, an incredible premium, for XTO Energy ( XTO). Then Total, the French energy giant, ponied up $2.25 billion for a quarter stake of Chesapeake's ( CHK) Texas shale fields. Last week, BP ( BP) paid a smaller amount to acquire a one-half stake of Lewis Energy's Texas shale holdings. And that has been followed by this most recent Arrow Energy deal offer from Shell and PetroChina. Is the pattern obvious enough yet? It is to me: Large multinational energy companies with free capital are paying up big to get more exposure to natural gas -- often paying enormous buyout premiums. How do you play this going forward? You could look for natural gas companies to speculate on as buyout targets. As a lifetime trader, I have found that to be a very difficult game to get right and best left to others.
The positive side of this game is that if you catch one right, you're likely to get a pretty quick 15% to 35% return on your bet. EOG Resources ( EOG) tops the list of companies on the radar for buyout speculation, although with a $25 billion market cap, it would require a suitor with Exxon-type capital. EOG, selling close to $100 a share and double its 52-week low share price, shows you that it already has taken a lot of speculative money. A better stab in the dark for a buyout would be someone like Newfield Exploration ( NFX), with its comestible $7 billion market cap and 3.6 trillion cubic feet of proven natural gas reserve or $1.6 billion Sandridge Energy ( SD), a Boone Pickens favorite. Smaller fish that have less to offer but are much cheaper include Gastar Exploration ( GST), with its $250 million market cap, and Ram Energy ( RAME) with its $125 million market cap, both of which have some exposure to shale resources in Texas and West Virginia.
But for the rest of us not ready to just roll the dice on a buyout, you can position yourself with one of the dedicated natural gas majors. While large integrated oil companies like Chevron ( CVX), BP, ConocoPhillips ( COP), Marathon Oil ( MRO), etc., have natural gas assets, you are looking to concentrate your bet into natural gas and need a company dedicated exclusively to the stuff. This brings us back to the big four I have been touting for the last year: Anadarko Petroleum ( APC), Apache ( APA), Devon Energy ( DVN) and my recent favorite CHK. XTO Energy, by the way, was the last of what used to be my big five, before the Exxon deal. In my next column, I'll drill down (pardon the pun) on the plusses and minuses of owning each of these, but the most important takeaway is to have a significant part of your energy portfolio in dedicated natural gas plays. Natural gas is such an obvious next step in our energy future that I recommend owning this sector more highly than any other inside the energy space. Any way you do it, this is an idea you need to act on.