Three Reasons to Like Nat Gas E&Ps


"Shale gas plays transformed the economics of domestic nat gas market."

We continue to find attractive value plays amongst the natural gas E&P names. We like this sector for a number of reasons:
  1. The U.S. is self-sufficient and has many decades of domestic reserves. Shifting some of our consumption away from foreign oil would reduce our reliance on a volatile region for our energy supplies and is, clearly, in our best interest.

  2. Natural gas generates around 2/3 of the C02 of crude-oil-based products and only 50% that of coal. Therefore, natural gas must be part of any serious effort to reduce our carbon-based pollution.

  3. Natural gas is far cheaper than crude oil on a BTU-equivalent basis. At current prices, nat gas produces energy at about 1/3 the price of crude oil.
And yet, there are still serious obstacles to the U.S. altering its mix of energy sources. As a replacement for gasoline, nat gas suffers from a shortage of infrastructure to provide retail distribution. It also has to be stored at extremely high pressures and at temperatures as low as -260 degrees F, which makes it harder and more expensive to handle. While T. Boone Pickens argues relentlessly in favor of converting the U.S. fleet of trucks to nat gas, it's unlikely to happen without Federal tax breaks and these don't appear to be on the horizon.

The shale gas plays have really transformed the economics of the domestic natural gas market. By allowing access to abundant supplies, shale drilling has both improved our position of self-sufficiency while propagating uneconomic production as E&P companies drill in order to retain the leases they've bought. While the low returns on capital that result should be self-correcting, for the bulls on natural gas and their related E&P stocks—it's an interminable wait.

This is why so many names appear attractive—their prices are weak.

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