This year already been kind to most commodities. Rare earth metals? Ridiculous. Silver? Stupendous. Orange juice? Outstanding. Corn? Cowabunga. Gas main? Not so much. Prices are down around 24% this year, as market place remains stubbornly oversupplied. Weak postrecession demand from customers have met with a great deal of gas flowing around the nation's shale wells. Pontifications that declines from conventional gas wells would overwhelm these unconventional supply additions have not panned out. Daily gas production in Texas is higher computer system was a year ago. National production is up a chunky 6% or so, according to good quality government data.
So will the foreign exchange market turn around this season? I don't really know. But like a value guy, I am drawn to the beaten-down, overlooked, and unloved. While it's to find a value-priced oil stock today, you can't walk down Wall Street without tripping over a cheap-looking gas stock. So this is where I'm focusing my search. Now, how to choose among the legions of gas-weighted makers? Well, I could just pick a high-cost producer and pray for $6 gas prices, but does not seem prudent. Neither does investing from a player with a ton of debt, which could spell lights out if a propane rebound doesn't materialize in time. These considerations would evidently rule out the likes of Goodrich Petroleum (NYSE: GDP), with its high all-in cost structure, andDelta Petroleum (Nasdaq: DPTR), having its scary debt-to-EBITDA ratio of nearly 10 times.
The sorts of companies that make my short list include Ultra Petroleum (NYSE: UPL),Southwestern Energy (NYSE: SWN), and Range Resources (NYSE: RRC). Each company has low-cost operations and a dominant niche in one of the major unconventional North American onshore gas takes. For Ultra, that's the Pinedale. Southwestern rules of the Fayetteville, while Range reigns in the Marcellus. The firms strike me as shareholder-friendly, and I think any would create a fine addition a new Foolish portfolio. I can only pick one, however, so I will go with Range Resources. Here are some points in favor of the Marcellus maven:
Massive captive resource base:- Range pegs its Marcellus resource potential at 20 trillion to 27 trillion cubic feet equivalent of fumes. The company can (and does) go looking for plays in other basins, but it doesn't need to. We're talking about decades of high-growth development ahead.
Tight focus:- Range has announced it is seeking a sale of its Barnett shale assets. In October, I estimated that this package could go for $1.5 billion. After taxes, that could just about cover this year's capital budget. Such an arrangement would also narrow management's focus, probably improve margins, and also show how undervalued the remaining industry is.
Free Appalachian option:- In August, I posited that investors are getting an option on other productive horizons (i.e. those shallower or deeper than the Marcellus formation) across Range's Appalachian plot. The company has kept pretty quiet on the 'stacked pay' potential, but that may change in 2011 especially if the shares slump back under $40, once they did this past summer.
Takeover bait:- While smaller integrated players pump cash into oil plays like the Bakken, the majors continue to show an interest in Marcellus acquisitions. Chevron (NYSE: CVX) recently struck while the iron was cold, picking up Atlas Energy (Nasdaq: ATLS) for $4.3 thousand. Royal Dutch Shell bought East Resources for $4.7 billion trapped on tape. Range is a larger prize, but not beyond these supermajors' means by any means. Of course, this stock's not a slam dunk. One ongoing risk is a major backlash against hydraulic fracturing. Range has been proactive on this front, choosing to voluntarily disclose the frac fluid additives used at each drilling site. A state or federal ban of hydrofracturing is still a possibility, if remote. This practice has enabled shale gas deposits to become money. Without it, Range doesn't have much of one's business (and neither do many of the company's competitors).