Good times are ahead for natural gas explorers as the
commodity's pricing environment is anticipated to improve further
in the near term. The expectation is fueled not only by a reduced
inventory, but also by greater demand as utilities shift from
coal-fired to natural gas plants for electricity generation in the
face of summer temperatures that have been steadily rising over the
A cold snap in early 2014 boosted the demand for natural gas as
both residential and commercial consumers sought space heating and
lowered the storage level. As per the Energy Information
Administration (EIA), which provides official energy statistics
from the U.S. Government, natural gas held in underground storage
is currently 31.0% below the 5-year average stockpile.
Move Toward Nat Gas fired Plant:
With an aim to combat climate change, the United States
Environmental Protection Agency recently came up with a plan to
reduce carbon emission from power plants by 30% from the 2005 level
by 2030. We all know that power plants fueled by coal emit the
highest level of carbon dioxide. Hence, we expect the U.S. to
gradually shift focus to natural gas fired plants and retire the
In fact, the country started witnessing this shift last year. As
per EIA, of more than 13,500 megawatts (MW) power capacity added in
the U.S. last year, natural gas comprised more than 50%.
Rising Summer Temperatures:
Over the last few decades, U.S. summer temperatures have been
rising, mainly due to the emission of heat-trapping greenhouse
gases. This, in turn, has been favoring the price of natural gas in
summer as the demand for space cooling is on the rise.
The Result: Natural Gas Prices Rise
have recovered strongly from a 10-year low of $1.82 per million Btu
(MMBtu) during late Apr 2012 to the current level of around $4.35
per MMBtu. While the odd pullback to $3.50 cannot be ruled out,
strong fundamentals point to higher natural gas prices in the
The positive demand supply equation presents the natural gas
upstream companies with enough opportunities going forward. We
present three stocks which possess the potential to grow in such an
environment, each of which also has a good Zacks rank.
QEP Resources Inc
The Denver, CO-based company is a leading independent energy
company mainly engaged in the exploration, development and
production of natural gas.QEP Resources' operations are focused on
the Northern Region (primarily in the Rockies and the Williston
Basin) and the Southern Region (primarily Oklahoma, the Texas
Panhandle and Louisiana) of the U.S.
As of year-end 2013, QEP Resources had 4,061.9 billion cubic
feet equivalent (Bcfe) in proved reserves (63% natural gas).
Approximately 75% of this was located in the Northern Region, while
25% came from the Southern Region. QEP Resources' output totaled
309.0 Bcfe in 2013, of which nearly 71% was natural gas.
The company currently sports a Zacks Rank #1 (Strong Buy) and has
expected long term earnings growth of 15.0%.
Headquartered in Calgary, Alberta, Encana is a focused pure-play
natural gas exploration and production company. It is the second
largest gas producer in North America, and holds a highly
competitive land and resource position in a number of the region's
most promising shale and tight gas resource plays.
The company's prolific gas resource plays include Coalbed
methane (CBM) in central and southern Alberta, Bighorn Deep Basin
in western Alberta, Cutbank Ridge and Greater Sierra in British
Columbia, Jonah in Wyoming, Piceance in Colorado, the Barnett shale
play in Fort Worth, and Bossier in east Texas.
As of year-end 2013, Encana had 10.0 trillion cubic feet equivalent
(Tcfe) in proved reserves, of which roughly 86% was natural gas.
Apart from a Zacks Rank #1, Encana has expected earnings growth of
6.0%. It has a forward price-to-earnings ratio P/E of 14.07x, which
is lower than the peer group's average of 19.00x.
Ultra Petroleum Corp.
Based in Houston, TX, Ultra Petroleum is an independent energy firm
primarily involved in the acquisition, development, exploration and
production of natural gas properties. The company's operations are
focused on the Green River Basin of southwest Wyoming, mainly
covering the Pinedale and the Jonah fields. Ultra Petroleum also
holds impressive acreage in the north-central Pennsylvania area of
the Appalachian Basin and the Uinta Basin in northeast Utah.
As of year-end 2013, the company had 3.61 trillion cubic feet
equivalent (Tcfe) in proved reserves, of which more than 94% was
natural gas and about 53% was developed.
Ultra Petroleum holds a Zacks Rank #2 (Buy) and has an expected
earnings growth of 13.55%. The P/E for the firm is 9.93x, also
below the peer group average of 25.91x.
Although the natural gas upstream companies are exposed to volatile
gas prices, we still have enough reasons to believe that natural
gas prices will favor the companies in the near term. Companies
with a solid reserve base and good fundamentals are expected to
cash in a better pricing environment and translate it to increased
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