3 Stocks to Profit From U.S. Natural Gas Phenomenon

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ryan Fuhrmann

NEW YORK ( StreetAuthority) -- The Department of Energy estimates that the United States holds as much as 2.5 trillion cubic feet of natural gas, which is enough to meet domestic energy demand for at least a century. Great advances in extraction techniques, including fracturing, or "fracking" of shale rock formations by drilling sideways, have simply revolutionized the domestic energy industry and led to a tripling of reserve estimates during the past few years.

And while natural gas prices have remained low due to the dramatic increase in production during the past few years, it hasn't stopped firms from spending big money to increase production. Deep-pocketed international investors are even lining up to get in on the action. In the past couple of weeks, Chinese, French and Japanese firms invested an estimated $8 billion in shale-rock energy formations.

Sinopec of China acquired a stake in five projects being developed by Devon Energy ( DVN) for $900 million and agreed to pay close to $2 billion in future development costs. Total ( TOT) of France also announced a similar $2.3 billion deal with Chesapeake Energy ( CHK), while Japanese trading house Itochu Corp. contributed just over $1 billion for a 25% stake in Samson Investment Co., another shale-gas play.

With this vast and growing potential, here are three potentially lucrative plays for individual investors.

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1. Exxon Mobil (XOM)

Diversified energy giant Exxon Mobil has a reputation as one of the savviest capital allocators in the industry. No better example of its foresight into industry trends is the 2009 purchase of XTO Energy, which along with Chesapeake, was one of the largest owners of U.S. natural gas reserves. The deal was completed in June 2010 for $41 billion and immediately made Exxon one of the biggest beneficiaries of the revival in U.S. production.

Given Exxon's total current market capitalization of more than $400 billion, investors will obviously gain exposure to its global reserve, production and refining capabilities. The XTO deal offers investors the opportunity for diversified exposure to more unconventional development, including shale gas and the potential to export U.S. natural gas to other countries through the use of liquefied natural gas.

Overall, Exxon sells at a very reasonable forward price to earnings (P/E) ratio of 10, offers decent income potential with a current dividend yield of 2.2% and should be capable of growing earnings close to 10% annually for the foreseeable future.

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2. Devon (DVN)

In the mid-cap space, the international interest in Devon speaks to its appeal as an individual investment opportunity. Along with Exxon, Devon realized the potential of onshore U.S. drilling and production activity and sought to sell off business not directly exposed to North America.

The company is also ambitiously building out exposure to liquid natural gas. Analysts project nearly 9% sales growth this year to almost $11 billion, and earnings of more than $6 per share. This would represent annual earnings growth of 6%, but a revamped firm focused on North American natural gas going forward means the potential exists for double-digit annual profit growth going forward.

Rival firm Chesapeake has a similar profile to Devon and has its fortunes firmly tied to natural gas, which comprises 99% of its total production. It is also looking to sell off assets to free up capital for domestic production expansion, such as in liquid natural gas. The only downside for Chesapeake is its higher debt load, and it isn't growing as fast as Devon.

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3. Enerplus (ERF)

An interesting small-cap oil and gas play is Canadian-based Enerplus Corp. Enerplus is based out of Calgary and has appealing acreage in Alberta and British Columbia, including an estimated 65,000 acres that are still yet to be developed. Like Devon, it has pursued a strategy to right-size its asset mix and sell off several assets to leave exposure to a more appealing asset base with higher growth potential. The company believes it can boost production by 10% to 15% annually during the next five years.

The stock offers an appealing mix of growth and income potential. The current dividend yield is 8.4% and should appeal greatly to income-minded investors.

Action to Take: When Exxon first announced its acquisition of XTO, the deal hinged on the widespread acceptance of fracking and related unconventional drilling techniques. A couple of years later, the techniques remain somewhat controversial, but are still developing and serving to permanently alter the North American energy industry. Exxon Mobil represents one of the safest ways to play this important secular trend, but more daring investors may want to venture into Devon in the mid cap space and even Enerplus in small-cap territory.

I estimate that these three plays hold the potential for double-digit shareholder gains in each of the next five years, with Enerplus offering the opportunity for investors to pocket much of the growth in the form of an annual dividend yield.

Disclosure: At the time of publication, Ryan Fuhrmann owned no positions in securities mentioned in this article. StreetAuthority owns shares of CHK in one or more if its "real money" portfolios.

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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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