Chesapeake Energy Corporation (CHK), Williams Companies, Inc. (WMB), and Kinder Morgan Energy Partners LP (KMP): Three Big Players in the Oil & Gas Sector

The oil and gas business is one of the most profitable in the planet. Some major players offer specific services and products and, therefore, interesting investment prospects. In this article we will examine

Chesapeake Energy Corporation (NYSE:CHK), Williams Companies, Inc. (NYSE:WMB), and Kinder Morgan Energy Partners LP (NYSE:KMP) so as to elucidate how profitable they can be for investors.

A bet on the natural gas

Independent oil and gas company Chesapeake Energy Corporation (NYSE:CHK) offers the best natural gas assets in the market. Although this does not mean much by itself, comparing its values to the stock price of $19.29 reveals some interesting ratios. Chesapeake Energy Corporation (NYSE:CHK) currently trades at 0.8x P/B and 0.9888x P/S, both considerably below the respective 1.66x and 3.43x industry medians. Despite these figures have encouraged some analysts to recommend buying, most experts (Zacks, Barrons, Wall Street Journal, Morningstar) would advise holding this firm´s stock.

Chesapeake Energy Corporation (NYSE:CHK)

Those who suggest buying have focused on several positive points in the company. For starters, as natural gas prices are currently in a downtrend, important capital investments in rich liquid drillings should drive the firm´s future profits. Projections estimate a 7% drop in natural gas production during 2013, but also growth of approximately 27% in liquids production. In addition, several planned asset sales for $4-$7 billion will help reduce the firm’s long term debt and finance its ongoing operations, currently reporting deficits because of the low prices of natural gas.

Although dividend yield of 1.85% at a low stock price is quite alluring and the Sinopec joint venture provides opportunities for future production expansion, the fact is that most of Chesapeake Energy Corporation (NYSE:CHK)´s financials look pretty alarming:

– Negative operating margin of -13.8% is upon the worst in the segment.

Below zero net margin of -6.2% also situates Chesapeake Energy Corporation (NYSE:CHK) amongst the poorest performing companies in the sector.

Return on Equity of -4.9%, Return on Assets of -1.8% and Return on Capital of -5% puts the firm at the end of the segment´s line too.

Gross margin shrank to 38.6% last quarter, less than half the value announced for year 2011. The past 10 years have registered an average gross margin decline of 3,5% each year.

Despite the success of the asset monetization plan, the firm is still considerably leveraged, offering a poor 0.023 cash to debt ratio.

Although the company´s aggressive business model has helped them control almost every major unconventional energy play in the U.S., their trend to outspend the existing cash flow has worried many investors.

A Stock With A Long Term Prospect

With almost 100 years of experience in the energy infrastructure and transportation sector, Williams Companies, Inc. (NYSE:WMB) is placed in an advantaged position to connect natural gas and natural gas liquid (NGL) sources to areas of increasing demand. Given this condition, the firm offers one of the best long-term growth prospects within the segment. However, opinions are divided. While Zacks and Morningstar analysts recommend holding, most of Barrons and Wall Street Journal experts advise to Buy.

In line with Barrons and the WSJ, Ken Fisher just recently acquired Williams Companies, Inc. (NYSE:WMB) stock and has already perceived an increase of around 9% in his share’s price. Reasons to follow this investment guru are several:

-The infrastructure: Williams family, composed by Williams Companies, Inc. (NYSE:WMB), Williams Partners L.P. (NYSE:WPZ) and Access Midstream Partners LP (NYSE:ACMP), possesses both a well-established infrastructure and the resources to face further expansion and face the growing energy demand in the U.S.

The firm operates in over 20 U.S. States and in Canada, and its integrated infrastructure assets include the U.S.’ biggest natural gas distribution structure, Transco; the Marcellus/Utica extraction and processing complex with approximately 5 million dedicated acres; and Geismar, a 1.3b lb/yr olefins facility with increasing capacity.