NEW YORK (TheStreet) -- Natural gas from hydraulic fracking has been the great advance that could propel the U.S. toward becoming truly energy independent. But for the energy companies producing natural gas from fracking, it has created big problems.
That's because the production of natural gas from shale has become so prolific that it has helped to positively crater the prices for natural gas. Although low prices are good for industrial development and for consumers, they are very bad for the bottom line for energy companies.
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That's clear from the headline Monday that Encana (ECA) , one of Canada's largest natural gas companies, has agreed to buy Athlon Energy (ATHL) , a relatively new oil producer in the Permian Basin, for close to $6 billion dollars. Although Encana is a solid energy company with tremendous assets and a terrific balance sheet, it is primarily a natural gas producer that has missed out on the big profits that have gone in the last two years to companies concentrating on procuring oil from shale.
Following is a chart that perfectly represents the flood of surplus natural gas production from shale.
Courtesy of Energy Information Administration
The explosive increases in gas production are a representation of a kind of self-defeating race for gas producers, as each tries to increase production while reducing its costs of production. This has been particularly evident with the producers in the Marcellus, and although some of the really sharp players have continued to shave away at their costs, the continuing low price for their natural gas has helped keep their profits in check.
It was hoped that well sequestration, started by Chesapeake Energy (CHK) several years ago; power plant conversion to natural gas from coal; and more rapid use of natural gas as a transport fuel for trucks and cars would help soak up the continuing glut of production and spark higher prices. But the conversion from a "crude-based" energy economy to one more anchored by natural gas has proven slow. Natural gas prices continue to hover at less than $4 per thousand cubic feet, where by comparison European prices are above $10 and Japanese prices are closer to $17.
It is difficult to see when this pattern of product glut will change and there will be investment opportunities from a steady and low natural gas price. One area where I have suggested there is an opportunity is in liquid natural gas, a processed form of dry gas that can be exported to more profitable marketplaces in Europe and Asia. Cheniere (LNG) will be the first company to export liquid natural gas from a U.S.-based terminal, but its first shipment is still almost a year away while their stock has already increased almost fivefold.
Other LNG opportunities might be in Golar (GLNG) , which uses upgraded tankers to process and transport liquid natural gas right on board. These are expensive upgrades and Golar is deeply in debt, yet its stock has also had a very sharp ride higher as well. It is hard to classify these stocks as value plays.
One thing that remains fairly clear is that natural gas prices are not likely to see a strong and sustainable price recovery soon. And that probably means that we'll see more deals from natural gas companies such as Encana looking to "get in" on the profits from crude oil offered by companies like Athlon.
At the time of publication, Dicker had no positions in stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates CHENIERE ENERGY INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate CHENIERE ENERGY INC (LNG) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and feeble growth in the company's earnings per share."
You can view the full analysis from the report here: LNG Ratings Report
TheStreet Ratings team rates GOLAR LNG LTD as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate GOLAR LNG LTD (GLNG) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and disappointing return on equity."
You can view the full analysis from the report here: GLNG Ratings Report