EOG Resources

High demand is fueling this natural gas producer's surge.

Symbol (NYSE): EOG

52-Week Range: $32.88-$13.69

Price on June 1: $32.88

Market Capitalization: $3.8 billion

Investors fuming over the high cost of cooling their homes can seek solace—and profits—in the stocks of Texas' natural gas producers, whose shares are surging. In May natural gas prices hit a three-year high on the New York Mercantile Exchange amid concerns about supply as the summer nears. Increasingly, power-hungry utilities are turning to clean-burning natural gas to generate electricity to power air conditioners (traditionally, the fuel has been used for home heating). Inventories are low because drilling for new gas has tapered off in recent years, so prices are rising, as are utility bills. And so are the prospects for long-suffering natural gas producers.

Among the Texas stocks in this group that oil and gas analysts like are Remington Oil and Gas (Nasdaq: ROIL) of Dallas and Anadarko Petroleum (NYSE: APC) of Houston. Perhaps the most attractive near-pure natural gas play, however, is Houston-based EOG Resources, which was spun off last year from Enron Corp., the nation's largest marketer of natural gas. EOG's share price has more than doubled this year, while its net income for the first quarter rose to $0.33 per share, up from $0.03 per share in the first quarter of 1999. According to Boston-based First Call/Thomson Financial, which compiles real-time broker-sourced research, EOG is expected to post a net income of $1.54 a share this year—more than triple its 1999 earnings.

And there's room for even more appreciation. Stephen Smith, an energy analyst in the Houston office of the brokerage firm Dain Rauscher Wessels, has a conservative twelve-month target price of $40 for EOG shares. Smith says EOG's "unhedged" position—it hasn't locked in a price for its gas—will allow it to take full advantage of today's escalating prices.

Of course, a price reversal would take the stocks of natural gas producers, including EOG, down with it. With price forecasts at record highs, investors are wondering how long the good times will last. The answer, industry experts say, is at least through next winter and possibly longer. "It's not just a few months," says Smith. "I think we're talking about several years." The depletion of reserves in the shallow waters of the Gulf of Mexico, which supplies 25 percent of the nation's natural gas, will keep supplies tight.

On May 18, encouraged by a bullish American Gas Association report that sent gas prices soaring, the Los Angeles brokerage firm Jefferies and Company raised its natural gas price forecast from $2.75 per million British thermal units to $3 for 2000 and 2001. Inventories are so low that even if the rig count goes from six hundred to seven hundred, it won't increase output enough to drive down prices, says Frank D. Bracken III, an oil and gas analyst in Jefferies' Austin office.

Meanwhile, demand is increasing—partly because natural gas is a cleaner source of fuel, partly because it's more efficient. Massachusetts-based Cambridge Energy Research Associates projects the use of natural gas will grow by 3 percent a year this decade. Other industry observers predict that U.S. natural gas consumption should rise by more than 50 percent during that period.

If they're right, it appears the "gas bubble"—as the supply glut that depressed prices for years is known—is finally deflating. That's one bubble investors won't mind popping.

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