EXCO Resources Inc (XCO), Chesapeake Energy Corporation (CHK): Can the Natural Gas Rally Continue?

Instead, companies focused primarily on drilling for oil and other liquids, which are more profitable to produce. For instance, Linn Energy LLC (NASDAQ:LINE) last year allocated a much greater portion of its capital spending budget toward liquids opportunities. The company mainly concentrated its operations in the Granite Wash play of Texas and Oklahoma, where it targeted a liquids-rich formation known as the Hogshooter.

But the recent rally in gas prices is sure to spur greater activity in gas plays across the country, reversing previous trends.

As the nation’s second-largest gas producer, Chesapeake Energy Corporation (NYSE:CHK) stands to gain significantly if prices rise further. Low gas prices have exacerbated the company’s troubling debt situation, forcing it to sell off several of its oil and gas assets over the past year in an effort to raise much-needed cash.

Though the company has allocated 85% of its drilling and completion capital expenditures for 2013 toward liquids plays, rising gas prices may give the company incentive to ramp up drilling in some of its gassier properties, such as the Marcellus, the Haynesville, and the Barnett shales.

Already, there is evidence that rising prices are motivating some producers to ramp up or resume drilling in gassier plays. In February, EnCana Corporation (USA) (NYSE:ECA) announced that it was resuming drilling in the Haynesville shale, thanks to wells that have become much more economical. A press release issued by the company stated:

“Because of the low supply costs in this play, Encana expects that the Haynesville will be able to produce solid returns at current natural gas prices. The company currently has two rigs running in the play with plans to increase to five rigs through 2013.”

Investors may also want to take a closer look at Ultra Petroleum Corp. (NYSE:UPL) , one of the lowest-cost producers of natural gas. For 2012, it had the industry’s second-lowest all-in costs per Mcfe at just around $3, less than half the industry average of $6.31. With its Marcellus and Pinedale Field assets boasting superior economics and falling well costs, Ultra is sure to benefit big time from rising gas prices.

The article Can the Natural Gas Rally Continue? originally appeared on Fool.com is written by Arjun Sreekumar.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ultra Petroleum and has options on Chesapeake Energy and Ultra Petroleum.

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