From the EPA announcement:

EPA constructed two deep monitoring wells to sample water in the aquifer. The draft report indicates that ground water in the aquifer contains compounds likely associated with gas production practices, including hydraulic fracturing. EPA also re-tested private and public drinking water wells in the community. The samples were consistent with chemicals identified in earlier EPA results released in 2010 and are generally below established health and safety standards. To ensure a transparent and rigorous analysis, EPA is releasing these findings for public comment and will submit them to an independent scientific review panel. The draft findings announced today are specific to Pavillion, where the fracturing is taking place in and below the drinking water aquifer and in close proximity to drinking water wells – production conditions different from those in many other areas of the country.

The EPA is careful to note that the study does not present a general indictment of fracking, but is specific to the wells around Pavillion. That distinction may get lost as the debate over fracking continues to heat up.

An Encana spokesman said that the study doesn’t prove anything. Rather, the contamination is a “probability — and based on the facts, not a good probability.” He noted that the methane and benzene that the EPA found were naturally occurring and are common in any gas-rich area.

Much of the detected contaminants were located in close proximity to the waste water pits that hold the fracking fluids after they have been pumped back out of the wells. In its draft report (available here), the EPA found:

Detection of high concentrations of benzene, xylenes, gasoline range organics, diesel range organics, and total purgeable hydrocarbons in ground water samples from shallow monitoring wells near pits indicates that pits are a source of shallow ground water contamination in the area of investigation.  When considered separately, pits represent potential source terms for localized ground water plumes of unknown extent. When considered as whole they represent potential broader contamination of shallow ground water. A number of stock and domestic wells in the area of investigation are fairly shallow (e.g., < 30 meters below ground surface) representing potential receptor pathways.

In other words, the fluid in the pits is seeping back into the ground and creating underground plumes that contaminate shallow ground water.

The gas wells at Pavillion are quite shallow, as modern-day drilling goes. The EPA noted that fracking occurred at one well at a depth of just 372 meters (about 1,200 ft). Some domestic and stock wells are as shallow as 800 feet. According to the draft, “With the exception of two production wells, surface casing of gas production wells do not extend below the maximum depth of domestic wells in the area of investigation.” That could allow methane and fracking fluids rather easily to flow into the groundwater.

Hydraulic fracturing of gas fields has been blamed for a rash of earthquakes in Arkansas and implicated in some minor quakes in the Dallas-Fort Worth area. This latest EPA study now links fracking to groundwater contamination. Could be some tough days ahead for producers.

Paul Ausick

Unlike the over-supply in other shipping markets, LNG vessels are in short supply and carriers like Teekay LNG Partners LP (NYSE: TGP) and Golar LNG Ltd. (NASDAQ: GLNG) are reaping the rewards. The global fleet for LNG carriers totals just 364 vessels. Day rates have risen above $100,000 and Golar is thought to be concluding a deal at $120,000. By 2013, the day rate could be as high $140,000.

These are the highest day rates since 2006, and are due to the fact that 90% of the LNG fleet is contracted on long-term deals that leave only a relative handful of vessels available for spot shipments. LNG cargoes headed for Europe have been redirected to Asia, where LNG prices are higher, increasing the amount of time the LNG carriers are hauling a single cargo.

Much of the LNG is coming from Qatar and is going to Japan. Before the earthquake and tsunami this past Spring, Japan consumed about 70 million tons of LNG annually. That number is expected to rise to 85 million tons in 2011 and 90 million tons in 2012. Qatar’s exports are soon expected to reach 120 million metric tons annually.

Until the recent US boom in shale gas extraction, the US was expected to be an importer of LNG and several receiving terminals had been proposed. Now, Cheniere Energy, Inc. (AMEX: LNG) and its subsidiary Cheniere Energy Partners LP (AMEX: CQP) have been approved to build a liquefaction facility at the Sabine Pass LNG receiving terminal, but that project is still a few years away. A proposed receiving terminal in Oregon has also begun the process of getting federal approval to export LNG.

The Kitimat LNG facility in British Columbia is another proposed LNG export terminal owned by Apache Corp. (NYSE: APA) with 40% and Encana Corp. (NYSE: ECA) and the Canadian arm of EOG Resources Inc. (NYSE: EOG), each with 30%. The feedstock will come from Apache and EOG fields in Canada. Initial annual capacity of five million metric tons is due in 2013.

The LNG carrier market could be constrained into 2013. New orders for LNG vessels totaled just 5 in 2010, compared with 45 so far this year. Vessels ordered this year are expected to be delivered in 2014-2015, but all may not be built.

The other impact on LNG carriers could come from new Pacific Rim facilities that will be closer to the Asian markets and lower demand for the long-haul trips from Europe and Africa.

For now, though, the outlook is strong for LNG carriers. Teekay has been only a bit better than flat for the past 12 months, but Golar shares are up more than 150%, though about 20% off of 52-week highs.

Paul Ausick

In our continuing hunt for value stocks, we looked at the largest producers of natural gas in the US and screened for the seven with market caps larger than $20 billion. These are Exxon Mobil Corp. (NYSE: XOM), BP plc (NYSE: BP), ConocoPhillips Corp. (NYSE: COP), Anadarko Petroleum Corp. (NYSE: APC, Devon Energy Corp. (NYSE: DVN), EOG Resources Inc. (NYSE: EOG), and Chesapeake Energy Corp. (NYSE: CHK). Production and reserves figures are based on information from the US Energy Information Administration and reflects 2009 totals. The agency has not yet released data for 2010.

Many of these companies are primarily crude oil producers, but all produce some amount of liquids and it is that liquids production that is keeping profits up at companies like EOG and Chesapeake which are primarily natural gas producers. The seven companies are listed below in market cap order.

Looking for value can be very tricky, particularly in commodity-related stocks and particularly when a sector is in a state of flux.  As we are still preparing for herder times, 24/7 Wall St. is searching for individual companies where their valuation already reflects much of the uncertainty in the markets even if the broader market cannot factor in forward events.  Having the term “value” does not imply immediate gains, but value investors invest ahead of, during, and after recessions.  They even invest when there are no obvious catalysts.

Exxon Mobil Corp. (NYSE: XOM) moved to the top of the list of natural gas producers with its purchase of XTO Energy. The company’s reserves total about 24 trillion cubic feet (Tcf) of natural gas. Combined production in 2009 totaled about 1.5Tcf. Exxon shares recently traded at $71.84 and its market cap is $349 billion. The stock’s 52-week trading range is $58.95-$87.16. The current value is trading at a price-to-book ratio of about 2.25 to 1. Its forward price earnings multiple is 8.05. The company currently pays a dividend yield of 2.62% to investors. Thomson Reuters has a consensus price target of $92.38, implying roughly 29% upside to the most recent price.

BP plc (NYSE: BP) reserves now total about 13.5Tcf and the company produced about 1Tcf in 2009. The company is still recovering from its Gulf of Mexico disaster in April 2010, and its 3 billion barrels of crude reserves are the largest among the seven companies in this list. BP’s shares recently traded at $36.43 and its market cap is $115 billion. The stock’s 52-week trading range is $35.15-$48.16. The current value is trading at a price-to-book ratio of about 1.07 to 1. Its forward price earnings multiple is 5.30. The company currently pays a dividend yield of 4.61% to investors. Thomson Reuters has a consensus price target of $55.76, implying roughly 53% upside to the most recent price.

The price of natural gas was decoupled from crude prices in 2007 and has never recovered. For a time in 2006, natural gas flirted with prices around $14/tcf, but that didn’t last long. The difference is due almost entirely to scarcity. Will natural gas recover even a little during 2011 or 2012? And how high will natural gas prices go?

The US Energy Information Administration projects an average price for natural gas of $4.24/tcf by the end of 2011, which is $0.15 lower than the average price in 2010. In 2012, the EIA expects a natural gas price of $4.41/tcf. In order to make a profit on natural gas, the industry needs a price in the range of $6-$8/tcf. That’s certainly not going to happen in the next 16 months unless some event of Biblical proportions should occur.

The 10 largest producers of natural gas in 2009 (the last year for which figures are currently available) were, in order, Exxon Mobil Corp. (NYSE: XOM), BP plc (NYSE: BP), Chesapeake Energy Corp. (NYSE: CHK), EnCana Corp. (NYSE: ECA), ConocoPhillips Corp. (NYSE: COP), Devon Energy Corp. (NYSE: DVN), EOG Resources, Inc. (NYSE: EOG), Anadarko Petroleum Corp. (NYSE: APC), Ultra Petroleum Corp. (NYSE: UPL), and Questar Corp. (NYSE: STR). Exxon’s top ranking includes its acquisition of XTO Energy, which had not officially been completed in 2009.

US natural gas production has changed dramatically since the adoption of horizontal drilling and hydraulic fracturing (fracking) of gas deposits trapped in nearly impermeable rocks generically called shale. Fracking makes much more gas recoverable and at a faster rate than conventional drilling. That’s one of the industry’s problems.

Leaseholders must drill within a specified period — usually three years — or lose their lease rights. Perhaps equally important is the nature of the hottest drilling areas themselves — shale gas fields, unlike their conventional counterparts, ordinarily ramp to full production much more quickly, hitting a peak quickly and producing an estimated 50% of lifetime production in the first year of operation.

The irony is that as shale gas production ramps up, conventional production is falling. The EIA estimates that natural gas production between now and 2035 will rise by an annual average of just 0.8%. But that’s a medium-to-long-term average. In the short run, production is rising quickly and depressing prices.

Over the longer term, natural gas prices are poised to rise. Gas-fired power plant construction is increasing as older and more polluting coal-fired plants are being taken out of service. The Daiichi Fukushima disaster in Japan has chilled nuclear power plant development and new US nuclear plants may never be built. Neither of these is having an immediate effect on natural gas prices, but both are medium-term boosters to gas prices.

A more significant impact could come in the somewhat longer term in global demand for liquefied natural gas (LNG). The bounty of US natural gas made available by horizontal drilling and fracking could be converted to LNG and shipped overseas. One US company, Cheniere Energy, Inc. (AMEX: LNG) that was planning to import LNG has been granted authorization to export LNG and expects to begin shipments in 2015.

None of this will affect natural gas prices for the rest of this year or into 2012. As summer’s heat gives way to cooler temperatures, demand for air conditioning will drop, reducing demand for natural gas. Demand will pick up again as the heating season begins, but summer is now the bigger demand period for natural gas and heating season supplies are likely to be plentiful.

An average price of no more than $4.10 is likely where natural gas will finish the year. For 2012 that could rise to $4.25, but anything higher seems unlikely. At least that’s the view from here.

Paul Ausick

That honor falls to smaller oil producers including Brigham Exploration Co. (NASDAQ: BEXP), Continental Resources, Inc. (NYSE: CLR), Concho Resources, Inc. (NYSE: CXO), Kodiak Oil & Gas Corp. (NYSE: KOG), Forest Oil Corp. (NYSE: FST), Stone Energy Corp. (NYSE: SGY), Whiting Petroleum Corp. (NYSE: WLL), Abraxas Petroleum Corp. (NASDAQ: AXAS), Approach Resources Inc. (NASDAQ: AREX), and Triangle Petroleum Corp. (AMEX: TPLM). Among services companies RPC Inc. (NYSE: RES), which doesn’t currently have any presence in the Bakken, is looking to join the bigger players up in the north country. A midstream company that is expanding its presence in the Bakken is Tesoro Logistics LP (NYSE: TLLP), a recent spin-off from refiner Tesoro Corp. (NYSE: TSO).

And last week, SemGroup Corp. (NYSE: SEMG) announced that it plans to create a new midstream company, Rose Rock Midstream LP, through a $181 million IPO. Rose Rock owns and operates a gathering, storage, transportation, and marketing business in the Bakken.

Current production from the Bakken shale is about 360,000 barrels/day and there are those who believe that figure will reach well over a million barrels/day in another five years. The US Geological Survey estimates about 4.4 billion potential barrels from the Bakken. Continental Resources’ chairman suggests that the real potential is about six times that.

Whatever the production, the problem remains how to get the oil to market. More pipelines are needed to get the oil to somewhere other than the market hub at Cushing, Oklahoma. The Bakken’s crude competes with the heavy crude coming from the Alberta oil sands for pipeline space and markets. Rail and truck transportation currently haul most of the Bakken’s crude.

A substantial portion of the Bakken’s production is transported by rail, which is far more expensive than pipeline transportation. But the high prices for crude are boosting rail transportation from the Bakken to the Gulf Coast to around 100,000 barrels/day this year. Some analysts think that number could triple by the end of 2012.

And there’s no end in sight for the transportation bottleneck. Proposed pipelines, like the Keystone XL, face opposition from environmental groups, and another proposal for a pipeline from Cushing to Houston died for lack of shipper interest.

The pipeline shortage can’t last. Moving crude by truck and rail is more expensive and far more likely to result in a massive spill than is pipeline transportation.

Transportation problems aside, the Bakken is booming now and is likely to continue growing for years.

Paul Ausick

AECOM Technology Corp. (NYSE: ACM) Reiterated Buy with $33 target at Argus.
American International Group, Inc. (NYSE: AIG) Raised to Market Perform at KBW.
Berkshire Hathaway Inc. (NYSE: BRK-A) Raised to Overweight at Barclays.
Boston Scientific (NYSE: BSX) Raised to Outperform as Bull of the Day at Zacks.
CBS Corp. (NYSE: CBS) Raised to Buy with $31 target at Argus.
First Solar Inc. (NASDAQ: FSLR) Maintained Buy but cut target to $140 at Argus.
Humana Inc. (NYSE: HUM) Raised to Buy at Goldman Sachs.
McDonald’s Corporation (NYSE: MCD) Raised to Conviction Buy List at Goldman Sachs.
Merck & Co. Inc. (NYSE: MRK) Raised to Buy at Jefferies.
Pfizer Inc. (NYSE: PFE) Raised to Buy at Goldman Sachs.
PPG Industries, Inc. (NYSE: PPG) Reiterated Buy as Value at Zacks.
StanCorp Financial Group (NYSE: SFG) Cut to Underperform as Bear of the Day at Zacks.
Tyco International Ltd. (NYSE: TYC) Raised to Buy at Goldman Sachs.
Wells Fargo & Company (NYSE: WFC) Raised to Outperform at FBR.
Wynn Resorts Ltd. (NASDAQ: WYNN) Raised to Hold at Citigroup.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

EOG Resources, Inc. (NYSE: EOG) is down 2.8% before market open to $93.25. This decline comes despite the fact that the company was upgraded to a buy at Citigroup.

McDonald’s Corporation (NASDAQ: MCD) is down 1.5% premarket to $83.80, relative to a 52-week range of $70.02-$89.57. This drop comes despite the fact that the fast food chain reported July global same-store sales up 5.1%.

Royal Dutch Shell (NYSE: RDS.A) is down nearly 3% before market open. Oppenheimer upgraded the company to outperform from perform.

Berkshire Hathaway Inc. (NYSE: BRK-A) Raised to Outperform at KBW.
The Coca-Cola Company (NYSE: KO) Raised to Conviction Buy List at Goldman Sachs.
Compania Cervecerias Unidas S.A. (NYSE: CCU) Cut to Underperform at Credit Suisse.
E.I. DuPont de Nemours (NYSE: DD) Maintained Outperform as Bull of the Day at Zacks.
EMC Corp. (NYSE: EMC) Raised to Buy at Auriga.
EOG Resources, Inc. (NYSE: EOG) Raised to Buy at Citigroup.
Gardner Denver, Inc. (NYSE: GDI) Reiterated Buy as Value at Zacks.
HomeAway, Inc. (NASDAQ: AWAY) Started as Hold at Stifel Nicolaus; Started as Overweight at JPMorgan; Started as Overweight at Morgan Stanley.
JB Hunt Transport Services Inc. (NASDAQ: JBHT) Cut to Neutral at Robert W. Baird.
KLA-Tencor Corporation (NASDAQ: KLAC) Raised to Overweight at Morgan Stanley.
NetApp, Inc. (NASDAQ: NTAP) Raised to Buy at Auriga.
Procter & Gamble Co. (NYSE: PG) Raised to Outperform at Bernstein.
Starbucks Corporation (NASDAQ: SBUX) Raised to Outperform at Robert W. Baird.
Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT) Raised to Outperform at Bernstein.
Tessera Technologies Inc. (NASDAQ: TSRA) named as Bear of the Day at Zacks.
Texas Instruments Inc. (NYSE: TXN) Cut to Market Perform at FBR.
Weight Watchers International, Inc. (NYSE: WTW) Started as Overweight with $80 target at Credit Suisse.
Yum! Brands, Inc. (NYSE: YUM) Raised to Outperform at Robert W. Baird.

• You can also see the top analyst calls of last week here, which have a much longer-term impact rather than just a day or two. Stocks noted: BAC, BRCD, DNDN, DG, LNKD, HK, POT, RSH, SNDK, SYMC, MCD, TEVA, TA, WMT, and YHOO.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

This poses a severe financial risk for many companies who are dependent upon the future of natural gas.  We are tracking United States Natural Gas (NYSE: UNG), Exxon Mobil Corp. (NYSE: XOM), Chesapeake Energy Corp. (NYSE: CHK), Encana Corp. (NYSE: ECA), Devon Energy Corp. (NYSE: DVN), EOG Resources Inc. (NYSE: EOG), and Questar Corp. (NYSE: STR).  Also being tracked are Cheniere Energy, Inc. (AMEX: LNG), Cheniere Energy Partners LP. (AMEX: CQP), Clean Energy Fuels Corp. (NASDAQ: CLNE) and Westport Innovations Inc. (NASDAQ: WPRT).  The losses are brutal, and the weak stock market is not helping things.

United States Natural Gas (NYSE: UNG) has to be one of the worst exchange-traded products out there because of erosion into roll-dates in the futures contracts.  Still, it is actively traded because investors can easily get exposure to natural gas on an intraday basis this way in their normal equity accounts.  This trust is down 3.6% at $9.97 and a new 52-week low of $9.94 was just hit this morning.

Exxon Mobil Corp. (NYSE: XOM) includes XTO after its huge natural gas acquisition.  Shares are down 1.3% at $76.71 and the 52-week range is $55.94 to $88.23.  Chesapeake Energy Corp. (NYSE: CHK) is the largest pure-play for natural gas and it recently even started a venture fund to drive nat-gas interests as part of the next energy policy.  Chesapeake is down a sharp 5.3% at $32.42 and the 52-week range is $19.68 to $35.95.

Encana Corp. (NYSE: ECA) is down 2.9% at $27.40 and close to 52-week lows as that range is $26.02 to $35.25.  Devon Energy Corp. (NYSE: DVN) is down 4.3% at $72.55 but its 52-week range is $59.07 to $93.56.  EOG Resources Inc. (NYSE: EOG) is down 4.1% at $93.96 versus a 52-week range of $85.42 to $121.44. Questar Corp. (NYSE: STR) is down only 1.7% at $17.95 and its 52-week range is $16.03 to $19.06.

Cheniere Energy, Inc. (AMEX: LNG), a liquefied natural gas (LNG) terminal operation, is down almost 9% at $8.89 versus a 52-week range of $2.30 to $12.81.  Its limited partnership is called Cheniere Energy Partners LP. (AMEX: CQP) and that is down ‘only 3.3%’ at $16.55 versus a 52-week range of $15.05 to $24.54.

Clean Energy Fuels Corp. (NASDAQ: CLNE) is T. Boone Pickens’ ‘gas station’ play that he wants to serve the nat-gas trucks as the refuel-stop on major trucking routes.  Shares are down more than 4% at $14.58 versus a 52-week range of $11.75 to $17.85.

Westport Innovations Inc. (NASDAQ: WPRT) is down 4.5% at $22.74 versus a 52-week range of $14.25 to $28.05.  The company specializes in alternative energy engines for trucks, particular those using compressed natural gas.

Dow Jones was calling for a build of 36 billion cubic feet, but the weekly gain reported by the Energy Information Administration was 44 billion cubic feet and U.S. inventories now sit at 2.758 trillion cubic feet.  What is interesting is that Dow Jones noted that this inventory build is still 2.4% under a 5-year average and more than 6% under year-ago levels.

Right now it feels like trying to find the bottom in selling levels is a bit like catching a falling knife.  It is just not very rewarding.  Maybe a bottom is close and maybe not in these stocks, but one thing is a sure bet: Natural gas dipping back under $4.00/tcf does pose a severe financial risk to the business viability of producing and even transporting natural gas.

Natural gas is not alone in its misery today.  Oil is back under $91.00 per barrel as well.

JON C. OGG

(27 MAY – 2 JUN) Ticker

Weekly Price Change (%)

Close Price 2Jun11

Close Price 27May11

Market Cap ($Mil)

16.6

46.90

40.22

6618.9

14.4

61.86

54.08

4255.3

3.0

426.42

414.00

2857.9

2.7

271.70

264.51

14261.8

2.6

346.10

337.41

320059.6

2.6

110.91

108.15

29772.1

2.3

39.69

38.79

9041.4

2.3

512.78

501.44

25458.0

2.3

49.39

48.30

53511.0

2.2

63.93

62.57

6838.6