Sunday, March 3, 2013

Three Large Natural Gas Stocks (NYSE: XOM) (NYSE: CHK) (NYSE: APC)

In the past five years the area I live in has experienced a gold rush that many residents have never experienced in their life time. The majority of Pennsylvanians had no idea the land they owned was stockpiled with Marcellus shale and natural gas. The price of land began to skyrocket as individuals began leasing their properties to natural gas exploration companies. I unfortunately was not able to partake in this sudden fortune but would like to provide one with an option to take advantage of the natural gas boom in the U.S.

It is estimated that natural gas vehicles are around 30% cheaper to refuel than gasoline vehicles. Not only is natural gas cheaper it also burns much more efficient and cleaner. Natural gas burns cleaner due to its lower carbon content. On average natural gas vehicles have 70% less carbon monoxide than conventional vehicles. There is a definite economic and political advantage to using natural gas as an alternative to gasoline or diesel.

If natural gas is cheaper and cleaner why isn't everyone using it already? The main reason everyone is not already using natural gas is infrastructure. It will take a lot of time and money to add natural gas pumps, produce vehicles capable of burning the fuel and extract enough natural gas to replace the supply of oil. This is not a far-fetched idea as Exxon Mobile predicts by 2040 natural gas demand will increase more than 60% and pass coal as the second most used fuel.

Exxon Mobile (NYSE: XOM) is the largest natural gas producer in the U.S. and is also the largest energy company in the world. Exxon Mobile has a vast product offering in the energy sector with the majority of its revenue coming from oil exploration it also has increased its natural gas exploration to take advantage of this growing alternative. In 2011 Exxon Mobile average 13.16 billion cubic feet of natural gas per day. With this high level of output Exxon is well positioned to capitalize on the growing natural gas industry.

Chesapeake Energy (NYSE: CHK) is the second largest natural gas producer in the U.S with an average of 3.5 billion cubic feet of natural gas per day in 2011. It has interest or owns around 45,700 oil or natural gas producing wells. Chesapeake Energy has the largest leaseholds of any company in the U.S. and the number one horizontal driller of shale wells in the world.

The advantage to investing in Chesapeake Energy over Exxon Mobile is its higher concentration in natural gas. For the fourth quarter 2012 62% of its revenue was from natural gas. Because it has a high focus on natural gas its stock will be more highly correlated with the gas industry. As natural gas usage grows and becomes more profitable it will see higher returns.

Anadarko Petroleum (NYSE: APC) is the third largest producer of natural gas in the U.S. with 2.5 billion cubic feet of natural gas per day in 2012. 22% of Anadarko's revenue came from natural gas and 62% came from oil for the full year 2012. Although it is the third largest producer it is still more heavily invested in oil exploration than natural gas. This doesn't mean its revenue mix will not change as natural gas becomes more profitable. At this point in time with the cost of oil raising it is more profitable for both Anadarko and shareholders for the focus to be oil.

Stock comparison
Exxon MobileChesapeake EnergyAnadarko Petroleum
Market cap:402.61B30.06B30.96B
Dividend yield:2.55%1.78%0.45%
10-year total return:11.88%10.60%13.70%

Because of natural gases allure both economically and politically if one were to determine to invest in the industry there are many individual factors that would determine which one of these three stocks to pick. First Chesapeake Energy would be for the investor who has an enthusiastic outlook for natural gas because of its high concentration it will benefit more than the others if natural gas meets or exceeds analyst expectations over the next 20 years.

The second stock would be for the investor who is seeking not only capital appreciation but income. Exxon Mobile offers an attractive dividend yield over 2.5% and has shown consistent dividend increases. This investment would also offer more diversification if natural gas prices stay suppressed and if it takes longer or there is less growth than anticipated.

Third Anadarko Petroleum offers the skeptic investor of natural gas an out with much higher resources and investment in oil exploration. If natural gas fails to meet expectations you would have the better hedge with its higher concentration in oil. If natural gas falls somewhere in between you can still benefit with nearly one fourth of its revenues coming from natural gas.

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