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3 natural gas picks to fuel profitsCommentary: Long-term plays that pay dividends
MARKETWATCH 5:00 AM ET 6/24/2013
Symbol Last Price Change
RRC 75.24 -2.06 (-2.66%)
USAC 22.48 -0.59 (-2.56%)
XOP 56.14 -2 (-3.44%)
EQT 77.53 -2.13 (-2.67%)
PXD 140.52 -4.09 (-2.83%)
WPX 18.9 -0.22 (-1.15%)
QUOTES AS OF 11:31:14 AM ET 06/24/2013
Right now, many investors are worried that the front-loaded returns of 2013 may go up in smoke. Federal Reserve fears, ugly China data and other unpleasant headlines have amped up the volatility on Wall Street lately.
But even if the market continues to see a rocky summer, that doesn't mean you should throw in the towel. A pullback may be a great opportunity to load up on long-term plays that pay big dividends.
And one attractive segment that fits this strategy are natural gas stocks.
There are a host of benefits for the sector that should outweigh any short-term troubles. Consider total domestic gas production jumped roughly 30% from 2005 to 2012 according to U.S. Energy Information Administration data. Clearly there is growth in this sector.
And yes, that production has resulted in a glut of supply since 2008 and a pinch to profits for natural gas stocks. But prices have firmed up nicely in the last year and hit a nearly two-year high in April -- so we may have reached equilibrium.
Bigger picture, a global recovery in 2014 or 2015 will assuredly mean increased energy demand and since nat gas is much cleaner to burn than oil or coal, that means these stocks are a great cyclical play.
With valuations cheap and hope for long-term growth, natural gas is an area worth watching for long-term investors.
Here are three ways to drill for profits, then, if you're interested:
Range Resources (RRC)
Range Resources (RRC) is one of the biggest direct plays on natural gas with a market cap of more than $12 billion. While there are bigger players out there, they tend to be a mix of oil and gas -- and while RRC has reserves of oil its $4.8 billion cubic feet as of the end of 2012 is the largest driver of this company.
So if you want a play on gas and not energy broadly, RRC is one of the biggies.
Shares are up handily, with 23% gains year-to-date on the strength of natural gas prices. Of course, since gas prices have softened since the spring RRC stock hasn't really gone anywhere... but for new money, that means this is your time for entry if you believe gas prices and demand will move higher.
The P/E is admittedly a bit pricey, with a forward earnings multiple in the 30s, so I'd be wary of buying right now. But on a 10% pullback Range Resources(RRC) could be a compelling long-term investment if you believe in the upside potential of natural gas.
USA Compression Partners (USAC)
USA Compression Partners (USAC) went public in January, but is hardly fits the typical definition of an IPO. Rather than a speculative technology stock, it's a $600 million MLP that specializes in compressing natural gas and pays a stable dividend.
Hey, don't yawn. While your eyes might glaze over with talk about how its focused primarily on partnerships with high-output shale gas companies or that compressed natural gas occupies just 1% of the volume of natural gas in a normal environment, there's a lot to be excited about.
Shares have popped 30% since the January IPO, for one. The current dividend yield, annualizing its first payout of 35 cents a share, is 6% -- with the certainty of big payouts going forward thanks to the MLP structure that demands USAC deliver most of its cash flow back to investors.
And since this stock is low-profile and unproven, it's still a decent bargain.
Bigger picture, the current chief executive has been in the business for 30 years and co-founded the company in 1998. So even though this is a newly minted stock, it is hardly an unestablished player that needs to find its way.
There are obvious IPO risks such as a lack of long-term track records and SEC filings. But if you're banking on natural gas growth in the next few years, USAC stock is a great place to be with big long-term income potential.
SPDR Oil & Gas ETF
Of course, if you don't like picking individual winners then check out the SPDR S&P Oil & Gas Exploration & Production ETF(XOP) . While there is exposure to crude oil businesses, as the name implies, there are a host of nat gas players in here too.
And frankly, if you're looking for diversification it helps to bake in a little bit of exposure to other energy plays this way. Some of its top holdings include EQT Corp.(EQT) , Pioneer Natural Resources(PXD) and WPX Energy(WPX) .
The XOP fund has admittedly underperformed in 2013, up about 7% vs. 11% gains for the S&P 500 since Jan. 1. However the ETF has beaten the market nicely in the last 12 months, with 28% gains vs. 20% gains for the S&P on rising optimism for the energy sector.
The gross expense ratio is 0.35%, or $35 a year on $10,000 invested. Of course since these are smaller exploration companies you miss out on the big dividend potential; current yield is just over 1%, so income investors may want to look elsewhere.
But in regards to a diversified investment to play the general trend of natural gas growth in a low-risk way, XOP is a great option.
Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter@JeffReevesIP. As of this writing, he did not hold a position in any of the stocks named here.