NEW YORK - I've briefed Wall Street before. This time, however, the 57th floor conference room is packed. Some heavy hitters invited me to explain why natural gas is the upcoming energy play.
By the size of the crowd, it seems the word is getting around.
The last time interest was this high, natural gas contracts on the New York Mercantile Exchange (NYMEX) were racing past $14 and the dominant players were making a fortune. We're about to see them try it again. Exxon Mobil Corp.'s (NYSE: XOM, Stock Forum) recent acquisition of shale gas producer XTO Energy Inc. (NYSE: XTO, Stock Forum), for example, is only the first of several moves we're about to see as the sector shakes itself out again.
This time, however, average investors can move early and reap the benefits.
In a matter of days, gas contracts have jumped more than 25%, approaching $6. That's sparked an interest in production. But there's a supply glut right now, so prices can't go much higher. Not in the near term, anyway. And that means the largest producers won't necessarily provide the heftiest returns.
For investors, the real money's in operationally efficient companies, like the ones I'm about to show you. They boast prime field locations, too. And they keep extraction costs low.
In the long term, of course, the fundamentals for natural gas are spectacular.
Demand will be higher than analysts expect
The Department of Energy projects a 15% rise in U.S. demand over the next two decades. But it will be higher than that. More power production from gas generation (instead of coal) and widening industrial applications should push the increase closer to 20% to 22%.
It gets better, though.
Unlike crude oil, we have enough gas reserves to cover all of our needs for at least the next century. And natural gas demand is increasing much faster in other parts of the world. That gives U.S. producers of liquefied natural gas more export potential.
So how can investors profit from natural gas now?
Here's what I told the fund managers and high-net-worth analysts in New York…
- U.S. demand is returning and natural gas is becoming the fuel of choice. But a tighter market means cheaper production will be nudging more expensive operations out of the picture.
- Smaller producers - ones that can provide constant volume at cheaper rates - will be the smart investment moves. Lean, hungry, niche operations are the ones who will make money.
- Unconventional production, especially shale gas, is providing more volume at lower prices than fast-maturing free-standing gas fields.
- Pipeline developments in the U.S. will be leveling off major regional price differences and improving the bottom line prospects of well-focused companies.
Now, people who attend my Wall Street briefings are usually making seven figures or more a year. These "market gurus" are supposed to be on top of the movers and make the correct calls. But that's usually not the case, especially in the energy market. That's why they call me in.
(It doesn't hurt, of course, that my data banks regularly follow 523 publicly-traded North American oil and gas producers, along with hundreds of overseas service providers and companies. As the energy sector heats up, several new ones are added each week.)
But while I'm quite content to invoice the Wall Street gaggle for my services, I never give these overpriced prima donnas investment advice. They serve merely to drive the current herd mentality in the Big Apple, often adding to the problems. They also burn out too quickly, replaced by another crew of even younger, less-experienced hot shots.
How young? One of them actually rode into my briefing on a skateboard!
These guys are not the real driving force in the market. That role is occupied by millions of individual investors - the real soul of the free market.
That's why I making my recommendations here, for people like you...
Top five natural gas companies
Applying the four points above, these are the top five natural gas producers to watch. They have all moved up sharply in recent trading and are primed for further advances:
All of these companies are focused. They're well managed. They have efficient, cost-effective operations. They're well located. And they're of moderate size. They also share another interesting characteristic: They're all primarily shale gas producers.
Devon and EOG are leaders in the Barnett Shale (Texas), Newfield in the Woodford Shale (Oklahoma), Range in the Marcellus, where Chesapeake, already a major shale gas producer in the southwestern U.S., is now the largest lease holder. And there are other producers coming up right behind them.
As the Exxon acquisition of XTO indicates, majors are looking to add companies having developed shale gas production. That will put the aforementioned five in play as M&A targets.