Topic: Energy Stocks

Commodity stocks: How to profit from a natural-gas price rally

Natural-gas prices have recently moved dramatically higher, jumping 57.5% to $3.78 U.S. per thousand cubic feet since early September.

That’s when natural gas hit a seven-year low of $2.40 U.S. per thousand cubic feet. Since then, a number of economic reports have pointed to a continued rebound. The resulting increase in industrial activity will lift natural-gas demand.

Production cuts will help lower natural-gas supplies

On top of the brighter economic picture, a number of commodity stocks that produce natural gas have cut back on drilling in response to lower prices and bulging inventories. For example, Suncor, one of the commodity stocks we cover in our Successful Investor newsletter, announced last week that it will significantly lower its gas production by the end of 2010. Production cuts by Suncor and other producers should help lower inventories over the coming months.

In the latest Stock Pickers Digest, our newsletter devoted to more aggressive investments (including natural-gas stocks), we take a close look at two commodity stocks that stand to gain further from the upturn in natural-gas prices: Cimarex Energy (New York symbol XEC) and Devon Energy Corp. (New York symbol DVN).

Gas-price spike could boost these two commodity stocks

Like Suncor, both Devon and Cimarex produce oil as well as natural gas, but both commodity stocks plan to remain heavily weighted to gas production. As well, both trade at low multiples to cash flow, even based on low gas prices. (Multiple to cash flow is a key measure of oil and gas stocks.)

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Cimarex Energy produces and explores for oil and natural gas, mainly in the U.S. Like many producers, it has been scaling back its gas production to await higher prices: In the latest quarter, it produced 7% less gas than it did a year earlier. But Cimarex is continuing its exploration and development activities: it will spend $500 million on this part of its business this year.

Like Cimarex, Devon Energy’s production is heavily weighted toward natural gas. The commodity stock’s properties are mainly Canada and the U.S. Aside from conventional production, they include shale oil in northern Texas, oil sands in Canada and deep-water wells in the Gulf of Mexico. Lower oil and gas prices weighed on Cimarex’s results in the latest quarter. It raised its production to compensate, but this wasn’t enough to offset the price declines. However, Devon has low debt. This will let it spend a high $3 billion on exploration and development this year.

In light of the spike in natural-gas prices, we’ve updated our advice on Cimarex and Devon in the latest Stock Pickers Digest. We’ll continue to closely monitor these stocks in the newsletter, as well as our weekly email and telephone Hotlines. Click here to learn more about how you can subscribe for one full year with no risk and no commitment.

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