Anadarko and EnCana: Favorites in natural gas
The outlook for this energy product is improving and warrants the attention of long-term investors.
By Jim Powell, Global Changes & Opportunities
The outlook for natural gas (NG) producers is improving much faster than expected. Energy consumers of every type are switching to natural gas in record numbers.
Given the changing outlook for natural gas, weak profits and low stock prices for the leading producers are unlikely to last much longer. I believe investors who want to capture the lion's share of the rebound should act soon.
New uses for NG are also being found, particularly in transportation. At the same time, there is a huge shift away from using coal in power plants.
The extreme weather patterns we are having are also boosting the demand for natural gas. The cold winter was a big drain on supplies.
Warmer summers should be even more taxing because air conditioners draw a great deal of power that many electric companies produce with natural gas. The rapid increase in new home construction will further increase the demand for NG.
Due to the exploding use of natural gas, prices rose 9% from January 1 to March 15. Shell Oil believes prices will be twice as high by 2015.
EnCana Company (ECA)
For an opportunity to get into the NG industry at an attractive price, I continue to recommend EnCana, a leading North American producer. EnCana has more natural gas deposits than either Chesapeake Energy or EOG Resources, two companies that get more media attention.
More importantly, EnCana is already making good use of the improving outlook for NG. In Mid-March the company announced it is resuming drilling in Texas and Louisiana and is seeing "solid returns at current natural gas prices."
EnCana was hammered by the cheap natural gas that started to flood the market three years ago. At its current beaten down level, I think the stock is very attractive. And since its price is already on the floor, there should be little chance of a big loss.
I think EnCana will perform very well for long-term investors. The forward price-to-earnings ratio for the stock is 15.9 and it has an attractive 4.2% dividend yield.
Anadarko Petroleum (APC)
Another way to play the prosperous future of natural gas is to invest in a high-volume offshore producer, particularly one that operates in ultra-deep water where some of the greatest reserves are located.
I think the best of that group is Anadarko Petroleum. Two weeks ago the company drilled into what may be the largest discovery ever made in the Gulf of Mexico. I think the extraordinary find will boost the company's profits for many years.
Anadarko should appeal to investors who would like an energy investment that is not totally dependent on rising natural gas prices. The company is also an important producer of oil that's already very profitable.
Even with the global economy in low gear, oil is still priced at about $100 a barrel. As a result, the company should have a bright future even if it didn't own enough natural gas to fill a balloon.
Anadarko has a 17.2 forward price-to-earnings ratio and it pays a small dividend. I expect continued growth from this successful energy producer.
To sum up: Anadarko is both an oil and a natural gas producer whose success can be seen in its stock price. I think Anadarko will continue to reward investors, but from this level it is unlikely to be a blockbuster.
EnCana's success is totally tied to the price of natural gas, and its stock has been pushed very low. If demand for natural gas continues to rise, as I expect, EnCana should deliver outstanding profits.
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Bill Stiritz owns more than 5% of the company, and has experienced an estimated $145 million in paper losses on his investment.
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