The monster year for the U.S. energy sector in 2013 set the stage for an even bigger blowout in 2014. And that’s exactly what’s happening, especially in the natural gas industry. Higher natural gas prices have led to recent 52-week highs for companies like Chesapeake Energy (NYSE:CHK), Encana (NYSE:ECA), and Devon Energy (NYSE:DVN).
Don’t think you’ve missed the boat on profits, though. Here are three other top players that should see a dramatic uptick in shares as the rest of the year unfolds – along with my No. 1 trick for spotting the best opportunities in today’s market.
The Outlook for Natural Gas
Just as the North American winter was brutal – and put a major dent in natural gas supplies – cooler-than-expected summer weather has allowed the industry to beef up reserves to higher-than-expected levels.
The result? Natural gas is now retesting its year lows at around $4.20.
There are two scenarios we could see from here. On the downside, if the price breaks below $4 per thousand cubic feet (mcf), we could see the mid-$3 level in a hurry.
On the upside, if the $4-per-mcf level holds, we could see another spike to the mid-$5 range in the fall – just as the weather gets cooler and speculation mounts about the possibility of a 2013-style winter. (In the commodities world, sometimes all you need is a mere hint of higher or lower prices… and the market will respond accordingly.)
That still gives Chesapeake, Encana, and Devon (as well as other natural gas stocks) strong investment potential at current levels – especially during the current pullback.
The Top Metric to Consider
Consider that energy companies in general are coming off a year in 2013 where both reserves and profits increased over 2012, even as capital expenditures actually decreased.
Expenditures in 2013 declined by 7% (to $173.5 billion) from 2012. This, coupled with higher natural gas prices, propelled profits. After-tax profits jumped to $33.4 billion in 2013 – up 53% over 2013.
In order for this trend to continue, companies will need to focus on two words: proven reserves. That is, what companies can actually reach economically, based on current prices. Everything else is just speculation.
Amid all the hype, proven reserves represent the No. 1 element to consider with regard to new energy discoveries – be they onshore, offshore, or shale plays. Last year, oil and gas flowed at a record pace, with production replacement rates well over 200%. This means companies added more to their reserves than they were producing. In order for companies to sustain long-term production, this rate needs to stay over 100%, otherwise companies will eventually run out of oil.
This upward trend looks set to continue – or even accelerate – over the remainder of 2014, as economic growth picks up.
In addition, the recent uptick in new job creation and dip in the unemployment rate to 6.1% means there will be a lot more spending on energy. That will further boost oil, gasoline, and especially natural gas prices in the months ahead. For the U.S. energy sector, it just doesn’t get any better than this.
To play the boom, it’s critical that you only focus on companies that are really participating in the boom. In addition to the three I mentioned earlier, I’ve pinpointed lesser-known names like EOG Resources (NYSE:EOG), Pioneer Natural Resources (NYSE:PXD), and up-and-coming plays like Laredo Petroleum (NYSE:LPI).
These companies boast significant upside potential. They’re either sitting on massive reserves that are well above industry replacement rates, or are exploring in prolific areas like the Permian Basin.