The future of energy in the world, not just America, is tied heavily to natural gas, as well as solar. Most recently I covered the importance of natural gas here on MarketWatch. The short story is that base-load energy is moving toward natural-gas generation as many nations discover shale gas reserves which can be tapped. Peak-load energy is moving toward solar because the sun is available during daytime peak-energy-demand hours, and the cost of solar has come down dramatically the past four years. Both trends are also driven by the growing realization that we should impact the climate as minimally as possible, which means that coal is becoming fuel non grata in many places.
Over the past couple of months, natural-gas stocks have been getting a significant beatdown. The chart of the First Trust ISE-Revere Natural Gas ETF FCG, -1.46% shows very clearly how bad it has gotten. If you are an ETF investor, this fund has a very good chance to trounce the S&P 500 in coming years, as both supply and demand for natural gas head higher. The natural-gas companies as a group should do very well unless there is another “end of the financial world” event. Here are four that have gotten badly beaten in recent weeks.
Chesapeake Energy CHK, -2.16% : I have discussed this company multiple times. Both the strong dollar and investors getting tired of waiting for the turnaround to be complete have driven Chesapeake shares down roughly 25% from their peak over the summer. Chesapeake is the one of the largest natural-gas acreage holders and gas producers in America.
As coal-fired utilities switch to natural gas and some exports start to occur, the market for natural gas will likely become firm, and more production from companies like Chesapeake will be demanded. I won’t rehash my entire commentary about the company, but I believe the value of their core assets minus debt make this company worth far more than it currently trades for. I am in good company, as Carl Icahn is on board here as well.
Flotek Industries FTK, -2.97% : As natural-gas prices have fallen, so has the share price of this small-cap drilling and production company serving the energy and mining industries. Flotek has made great strides to become a leader in better environmental drilling products and practices. Through several small acquisitions, the company appears to be positioned well for growth and possible acquisition itself. In particular, the company has begun to develop very promising international relationships.
Despite the purchases it has made, the company maintains a very good balance sheet. Insiders are heavy owners of shares, though several have lightened up as parts of planned sales. As insider-share sales slow and natural gas demand increases, I believe we will see strong share appreciation over time and possibly an eventual buyout.
Magnum Hunter Resources MHR, +0.58% : Magnum Hunter Resources is an oil and gas exploration and production company focused in three premier shale plays in North America with a combined 300,000 acres in the Marcellus, Utica and Williston Basin (Bakken). The proximity of the Marcellus and Utica to the high-demand East Coast and the efficiency of the Williston Basin give the company enormous upside on its assets. It seems likely the company might sell the rest of its Williston acreage and focus out east. Year to date the company has sold $125 million in non-core assets.
Magnum Hunter has taken the slow hand approach to ramping up production as it streamlines its balance sheet after years of land acquisitions. Its Utica wells are showing signs of being prolific. I expect the company to follow a similar path as Kodiak Oil & Gas which was acquired by Whiting Petroleum this year, although an even brighter Oasis Petroleum-type trajectory is possible. The company’s shares have sold off particularly hard recently as major shareholder Relational Investors disclosed it is closing its firm and winding down. Clearly, many investors jumped out first, significantly impacting this small-cap company’s shares. This is a unique opportunity to buy low.
Westport Innovations WPRT, -4.89% : Westport is the global leader in technology for natural gas engines for transportation. It currently holds 327 patents, which is more than Ford, Toyota and GM combined. The company and its affiliates have nearly 500 more patents pending. Westport designs are used in cars, trucks, buses and now locomotives. Westport has joint ventures with Cummins and Weichai of China giving it access to huge markets.
Over the past year the company has changed its business model from being an engine manufacturer to a supplier and partner with OEMs (original equipment manufacturers). This transition, though it has generated multiple new agreements, has been a slow painful process financially. Shareholders got fed up and threw in the towel recently when the company had to scale back revenue projections for 2014 and indicated another delay in becoming profitable. I am high on the company for a few reasons: It’s a technology leader in an industry that is growing, the company’s balance sheet is strong enough to weather the storm, insiders hold a large chunk of shares, and ultimately, I believe the new business model which will cut overhead and expand markets is the right one.
Disclosure: Kirk and certain clients of Bluemound Asset Management own shares of FCG, CHK, FTK, MHR and WPRT, as well as, are long calls of CHK, MHR and WPRT. Neither Kirk nor Bluemound clients plan any transactions in the next three trading days. FCG, CHK, FTK, MHR and WPRT are all currently recommended at Kirk’s American Resource Boom Letter. Opinions subject to change at any time without notice.