It’s Time To Pick Up Some NatGas Stocks

Concentrating as we have on oil and the ongoing recovery in certain oily E+P's, we've kind of ignored natural gas for the most part - and mostly for good reason.

But natural gas has staged a heckuva rally, albeit from insanely low numbers, and with it we've seen some terrific possible gains in some Marcellus and Utica players, provided we could have timed the entry right.

Sometimes, it's not about the quality of the stocks we buy - it's about the underlying commodity that we're betting on. Nowhere is that more evident than in Natural gas, where the price has ballooned from near $1.50/mcf to closer to $3 - and taken some of even the worst, most badly leveraged natural gas producers with it.

But, we've spent enough time in natural gas purgatory to begin picking at some names - there is an ongoing upwards pressure on price that's being provided by the current slow pace of pipeline building, best personified by the failed Williams' (WMB) Constitution pipeline and Kinder Morgan's (KMI) Northeast Energy Direct pipes. The coming demand pressure of LNG from Cheniere's (LNG) two export plants and Dominion's (D) planned Cove Point plant increases the likelihood of natural gas's price turnaround to be permanent, if not particularly fast.

So, where to go? Speaking of Cheniere, which has already been recommended and has nothing really to gain from natural gas prices going up, it still has benefited for some crazy reason from the Nat gas move - proving that the commodity can be more important than the company. Among the true natural gas plays, I've always tended to recommend EQT Corp. (EQT), certainly the most solid of the natural gas frackers, but far from the sexiest. But for a trade, I think recent circumstances make Southwestern Energy a worthwhile punt for another leg up in natural gas prices above $3.

Don't get me wrong; if there were a company that had more missteps than Southwestern, I'd be hard pressed to find it (except perhaps Chesapeake (CHK). They expanded well beyond the time when Nat gas prices, indeed when all energy prices were in the process of collapsing. The worst buy in energy, except perhaps the Encana (ECA) buy of Athlon Energy, might be the Southwestern purchase of Chesapeake Pennsylvania and West Virginia acreage in 2014 for $5.38 billion. Without the cash or market to develop the gargantuan purchase, Southwestern was forced into a massive secondary in January of 2015 at $23, well below their historic prices but far above where they ultimately bottomed at near to $5 earlier this year.

But it has seemed that finally, Southwestern has shored up the balance sheet enough to weather the next two years of debt pressure no matter what happens to natural gas. The latest secondary offering of 86 million shares at $13 should finally provide the cash that SWN needs to stop worrying for a while about debt, and worry more about delivering natural gas.

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I suppose I would have liked to buy SWN nearer to $5, but with Nat gas suffering under $2/mcf, I was unsure how quickly the commodity would recover and therefore how long SWN and others had to live. For quite a while there, I wasn't sure how many of the Marcellus producers would have to go bankrupt to stabilize the production in Pennsylvania, and although I'm not entirely convinced the Southwestern is the best survivor to bank on, I think it now is a reasonable bet to make solely on the thought that natural gas is done going down for the near term.

I'm recommending SWN at $12.50.