Only a decade ago, there was a widespread belief that oil and natural-gas resources were in permanent decline. The opponents of this idea believed that these natural resources will soon become scare. They feared that their prices would rise exponentially as a result of this scarcity. Because of this fear, investors and corporations spent an unprecedented amount of capital seeking out and producing new hydrocarbons. Today, those investments are bearing out to a degree almost no one could have imagined. This wave of investment began in 2003. It peaked in 2010 and 2011, when more than $1 trillion annually was spent around the world on oil and natural-gas exploration and production.
In 2011, as a result of this massive capital investment, the U.S. produced the most natural gas in history. The previous peak was in 1971. Over the past four years, gas production is up 20%. With all the new supply coming online, the price of gas crashed. From June 2011 to April 2012, it fell 63%. Then, when no one thought natural gas prices could go anywhere but down, the opposite happened. Prices began to rise. Since April 2012, natural gas prices have been in a strong uptrend, rising 114% in just 14 months.
There’s a certain anomaly waiting to be exploited. While gas prices have more than doubled, the share prices of gas companies have gone nowhere. Just 12 months ago, these companies were pulling gas out of the ground and selling it for $2 per thousand cubic feet (mcf). Today, the going price is nearly $4 per mcf. In just over a year, gas prices have doubled. Yet, the prices of companies that pull gas out of the ground and sell it are up just 5%. Higher gas prices should mean higher earnings. And that should translate to higher share prices for natural gas companies. But that hasn’t happened yet.
How to take advantage of this opportunity
I believe the best way to take advantage of this opportunity is to invest directly in shares of gas companies. There’s an abundance of gas companies, but there’re only a handful of high-quality companies with strong management in place, and with a constant focus on the shareholder. Below are my top three gas companies.
Chesapeake Energy Corporation (NYSE:CHK) is a $13 billion oil & gas company in the U.S. Chesapeake Energy Corporation (NYSE:CHK) was in the news several times in the past year after activist investor Carl Icahn bought a large stake in the company and kicked out the famously frivolous CEO, Aubrey McClendon. Chesapeake Energy Corporation (NYSE:CHK) is now much more shareholder-oriented and is working to resolve its debt issues. The company is very efficient with its drilling. It spends $2.2 per mcf while the industry average stands at roughly $3. I believe that WPX could be a great turnaround story after its shares have lagged the S&P 500 by more than 10% in the past 12 months.