Keep Your Eye on Natural Gas Companies

By David Lee Smith
February 26, 2009
www.fool.com - The Motley Fool
Crude oil, with its whipsaw pricing during 2008, clearly has received most of the attention given to energy over the past year. Indeed, who would have expected its per-barrel price to fluctuate from more than $145 in July to a winter levy below $35?

But lest you think that natural gas is taking a decided and irrevocable second place to its crude sibling, you need to know about the gas goings-on in a couple of areas of the world. In the U.S., for instance, a group of gas producers -- including Chesapeake (NYSE: CHK), the nation's top natural gas producer, and Devon (NYSE: DVN), its Oklahoma City neighbor -- are in the process of joining other independent producers in forming a lobby group aimed at promoting natural gas for power generation and transportation.

The difficulty in the current U.S. natural gas market -- as opposed to as recently as a couple of years ago -- is too much supply chasing too little demand. On the supply side, volumes have been pushed up by the discovery of vast new quantities of gas in tight rocks (shale). These discoveries have been in places like the Barnett Shale of North Texas, as well as the giant Haynesville Shale of Texas and Louisiana, where both Petrohawk (NYSE: HK) and EXCO Resources (NYSE: XCO) recently found gushers.

At the same time, the now nearly worldwide pullback in demand from such slowing industries as petrochemicals has precipitated a natural gas glut. The result has been a near 70% decline in gas prices just since July.

And then there's Australia, where a group of sizable companies, including Royal Dutch Shell (NYSE: RDS-A) and ConocoPhillips (NYSE: COP), have become active in coal-bed methane plays. The target: natural gas trapped within coal seams, primarily in Queensland in the northeastern part of the nation. One of the many benefits to coal-bed methane -- also known as coal-seam gas -- is that it is far greener and cleaner-burning than fossil fuels.

So while much of the world continues to be fixated on the deepwater oil discoveries offshore Brazil and Eastern Russia, for example, I urge my Foolish friends to keep your eyes glued to the stronger gas producers. Two of the names I've already mentioned are Chesapeake and Devon. I fervently believe that within the next couple of years, the world of gas will pick up significantly. On that basis, I'd recommend that you remain represented in this slow-moving -- but promising -- sector.

Both Chesapeake and Devon have received five-star ratings from Motley Fool CAPS players. Why not weigh in on your feelings about the two companies?