5 Natural Gas Stocks With Upside

NEW YORK (TheStreet) -- According to analysts polled by Bloomberg, Black Hills (BKH), OGE Energy (OGE), Boardwalk Pipeline Partners (BWP), Williams Partners (WPZ) and DTE Energy (DTE) have a minimum upside of 5% and have a bright outlook in the longer run, based on the switch from oil to natural gas.

Meanwhile, integrated oil and gas giants Exxon Mobil ( XOM), Chevron ( CVX) and ConocoPhillips ( COP) have upside values of 1%, 7% and 0%, respectively, as implied by the consensus estimates of their price targets compiled by Bloomberg.

In the current scenario, where natural gas and natural gas liquids are no longer the third link in the energy chain, but are key areas for many companies, it is time to focus on natural gas companies. These companies are regarded for their stability and high dividend yields. Driven by the robust growth forecast for China, pushing oil demand higher, speculation shows that oil prices are close to breaching the $100 a barrel mark in 2011.

The demand for substitutes like natural gas will rise in the upcoming years. Not only will consumers prefer to switch to natural gas, but large manufactures and energy producers will show interest. As per estimates of the Gerson Lehrman Group, China's natural gas consumption is estimated to reach 12.7 billion cubic feet (bcf) per day in 2011, sustaining the 20% growth levels from the prior year.

During 2010, ONEOK Partners ( OKS), Williams Partners, and Silverthorne Energy Partners ranked among companies that spent millions on NGL investments and are likely to expand their investments in 2011.

The stocks are stacked as per the upside percentage, great to greatest.

DTE Energy engages in the energy business, operating in four segments. Of the 12 analysts covering the stock, 25% recommend buying, while the remaining 67% advise holding. The stock has a 4.4% upside from current levels, with a dividend yield of 4.7%.

Looking ahead, the company's growth momentum is strong, backed by regulatory policies in Michigan, an assured 11% return on equity for its regulated assets from the Michigan Public Service Commission, a strong balance sheet and an attractive dividend yield. Moreover, the company has a regulatory provision to self-implement its requested rate hike for six months after filing. If the regulatory authority fails to decide on the rate within one year of filing, the proposed rates automatically turn permanent.

The company's balance sheet reflects a strong position with a long-term debt-to-capitalization ratio of 51.4% for the first nine months of 2010, compared to the industry average of 93.2%. A total of $7.1 billion in long-term debt comprises of only $923 million maturing in the near term, while the balance amount is in the form of fixed rate instruments, thereby indicating a longer period for repayments. In terms of operating cash flows, DTE has generated a significant $1.5 billion during the first nine months of 2010.

The company raised its quarterly dividend in July 2010 to 56 cents per share from 53 cents earlier. Based on this, it appears that the company has a secure and a reasonable projected earnings payout of almost 62.2% for 2010 and 60.5% for 2011.

Adding to the positivity, the company is focusing on its cost structure and is also directing capital investments toward renewable generation, utility infrastructure and environmental control assets. Furthermore, the company expects to achieve a 5%-6% long-term EPS growth target on improvement in cost structure and operational efficiency.

On one hand, DTE is trying to accumulate projects for its unregulated business in a bid to garner premium returns in the long run. On the other hand, it is ramping up its Advanced Metering Infrastructure and program for scrubber installation, thereby improving operational efficiency.

Williams Partners owns, operates and acquires a portfolio of energy assets. The company operates in two business segments: gas pipeline, and midstream gas and liquids. Of the 9 analysts covering the stock, 67% recommend buying, while the remaining rate holding. The stock has a 7.1% upside from current levels with a dividend yield of 6.2%. The company was ranked 6th for its pipeline & midstream assets divestiture, out of the top 10 merger and acquisitions deals in the Americas during 2010.

Recently, Fitch assigned a stable outlook to the stock, based on estimated cash flows generated from its pipeline and midstream assets. The rating agency says the company's corporate strategy in respect of acquisitions and organic growth improves its overall outlook. Moreover, Williams is set to gain from its newly acquired fee-based midstream assets.

Early 2010, the company started the divestiture procedure to acquire the assets of the company Pipeline & Midstream Assets. Williams has completed the acquisition of the midstream assets of Cabot Oil & Gas ( COG) in Susquehanna County for $150 million. The assets currently gather almost 230 million-240 million cubic feet (MMcf) per day of natural gas.

Williams has completed the acquisition of Bakken oil acreage in North Dakota for $925 million cash. The acquired project produces almost 3,300 barrels per day of net oil from 24 existing wells. Williams expects to double rig count to 6 from the present 3 operating in Dakota-3. Meanwhile, the company estimates Dakota-3 represent almost 185 million barrels of oil equivalent in the total net reserves potential in the Middle Bakken and the Upper Three Forks formations.

Extending the partnership with Cabot, it has also agreed to a new long-term dedicated gathering agreement with Cabot for its production facility in the northeast Pennsylvania area of Marcellus Shale.

In its third-quarter results, the company revealed that the newly acquired gathering and processing assets in the Colorado's Piceance Basin, for $782 million, will generate $105 million in segment profit plus depletion, depreciation and amortization for its midstream business in 2011.

Boardwalk Pipeline Partners, operating through its subsidiaries, owns and operates three interstate natural gas pipeline systems, including integrated storage facilities. The company's customers include marketers, local distribution companies, producers, electric power generators, interstate and intrastate pipelines, and direct industrial users. Of the 15 analysts covering the stock, 33% recommend buying, while 60% rate holding. The stock has 8.7% upside from current levels, with a current dividend yield of 7.1%, higher than the peer average of 6.5%.

BWP is building a 50-mile extension for the existing 30-inch pipe section in the Gulf South system for accessing Eagle Ford Shale's gas reserves. JPMorgan believes that the company's potential organic growth, through its projects and stable cash flows, provides a strong base for the growth rate of the stock. The current cash flow per share is $1.09.

In the pipeline of projects, the company is yet to receive FERC approval for its 54 MMcf per day Airport II Compression Project in the Gulf South System for compression expansion. The project is expected to come on-stream during the fourth quarter of 2011.

Subsequent to PHMSA approval to operate the Fayetteville lateral at its full design capacity, BWP intends to increase its volumes to 1.3 bcf per day from the earlier 1.1 bcf per day. This is estimated to contribute almost $16 million annually toward EBITDA.

Looking ahead, as the company's expenditure on its Haynesville compression project in its Gulf South system comes in at $110 million, below the estimated $185 million, total project costs decline $200 million. Boardwalk now estimates a capital expenditure growth of $75 million for 2011. The $30 million Clarence compression project has received FERC approval and has an anticipated in-service date sometime in 2011.

OGE Energy is an energy and energy services provider, offering physical delivery and related services for electricity and natural gas. The company operates through four segments: electric utility, natural gas transportation and storage, natural gas gathering and processing, and natural gas marketing. Of the 10 analysts covering the stock, 60% recommend buying, while the remaining advise holding. The stock has 10.4% upside from current levels, with a dividend yield of 3.6%.

A favorable buy, OGE Energy is backed by a regulated utility business, a strong economy of Oklahoma, a fixed-fee in its unregulated natural gas business, dividend yield and the ongoing infrastructure improvement programs. Besides chasing an aggressive energy efficiency program, OGE is investing in renewable energy projects and is updating the distribution system.

For stable earnings growth, the company has increased the proportion of fixed-fee business, converting existing contracts into new fixed-fee projects, from 8% in 2006 to 28% at the end of the first nine months of 2010.

The company recently increased its quarterly dividend to 37.5 cents per share from the earlier 36.25 cents per share, effective first-quarter 2011. This raises the annual dividend to $1.50 per share from $1.45 per share. Going forward, the company's dividend outlook remains strong as the management is aiming for 2% annual dividend growth through 2012, coupled with investment grade credit ratings.

For 2010, the company raised its earnings guidance to $2.95-$3.05 per share from the earlier $2.70-$2.95 per share. Additionally, the acquisition of Redbud, a wind development company, will enable it to meet almost 5%-7% of its long-term EPS growth target. Moreover, the topography of Oklahoma supports the development of wind-based energy assets.

Black Hills is a diversified energy company operating in two business segments: utilities and non-regulated energy. Of the 9 analysts covering the stock, 22% recommend buying, while the remaining advise holding, based on the promising returns the stock would offer on the industry's positive outlook. The stock has a 12.4% upside from current levels, with a dividend yield of 4.6%.

Despite lower dividend yield, in comparison to its peers (range of 5%-6.6%); the company is well positioned as it trades at a higher premium than its peer average. Furthermore, the company's strong earnings growth, which is 70% derived from its regulated electric and gas utilities, supports growth. This regulated segment of the business not only operates in constructive regulatory jurisdictions, but the rate adjustment mechanisms assure timely recovery of spending and investment, leading to a strong return on equity.

Moreover, as the non-regulated business carries higher risk than the regulated, Black Hills moderates and reduces earnings volatility through its coal mining, power projects and oil and gas drilling. The company's coal mining segment sells coal to Black Hills Power and Cheyenne Light, passing the operating costs to consumers. Thus, earnings flow from this business is stable, partially offsetting the unregulated business risk.

The oil and gas exploratory drilling business is focused on infill drilling and has a high success rate, assuring stable earnings.

In the upcoming years, analysts at JPMorgan expect the company to raise its dividend 2.5% annually and foresee earnings per share for 2011 to range between $1.90 and $2.15. The company is building a 200 mega watts power plant and is likely to sell output to the Colorado utility of Black Hills under a 20-year tolling contract. This is estimated to contribute almost 20 cents toward annual earnings per share, beginning 2012.

>To see these stocks in action, visit the 5 Natural Gas Stocks With Upside portfolio on Stockpickr.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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