In this chart using the ChartLab Pro methodology we are showing the top 5 strongest and weakest energy stocks based on the close of April 16th.  Cumulatively the top 5 names have outperformed the weakest 5 year to date by 28.92% and 12.79% Month to date.   The rankings are not picked by the stocks returns, they are chosen by their technical strength under the ChartLab Pro methodology.

The 5 strongest charts in the energy sector are Williams Companies, Inc. (NYSE: WMB), El Paso Corporation (NYSE: EP), Pioneer Natural Resources Co. (NYSE: PXD), ConocoPhillips (NYSE: COP), and Diamond Offshore Drilling, Inc. (NYSE: DO).

The 5 weakest charts in the energy Baker Hughes, Inc. (NYSE: BHI), Chesapeake Energy Corporation (NYSE: CHK), Cabot Oil & Gas Corporation (NYSE: COG), Southwestern Energy Co. (NYSE: SWN), and Newfield Exploration Co. (NYSE: NFX).

The infographic below is generated by Chartlabpro.com.

Natural gas prices at the Henry Hub have been rising, coming within a hair’s breadth of $5.00/million BTUs, a level last seen in August 2010. The low prices have slowed the growth in onshore drilling for natural gas in the US, at the same time that it is encouraging some utilities to look at natural gas as a fuel for baseload power generation.

The abundant supplies of US natural gas available throughout the drilling technique known as hydraulic fracturing, or ‘fracking’ or ‘fracing’, has swept the industry, leading to massive amounts of new gas discoveries and production, as well as to lower prices. The industry needs prices to rise to around $7-$8/million BTUs in order for it to make a decent profit, but with prices stuck below $5, that day appears to be well into the future.

Investing in natural gas purely as a commodity play is best left to experienced traders. There are, of course, other ways. Four funds we’ll look at here are United States Natural Gas Fund (NYSE: UNG), First Trust ISE-Revere Natural Gas Index Fund (NYSE: FCG), SPDR S&P Oil & Gas Exploration and Production (NYSE: XOP), and PowerShares Dynamic Oil & Gas Services Fund (NYSE: PXJ).

United States Natural Gas Fund (NYSE: UNG) invests in near-month natural gas NYMEX futures contracts. In the past 52-weeks, the fund has lost more than -25% of its NAV, but with $1.9 billion in assets it is the largest natural gas fund available. Because it invests only in near-month contracts, UNG must roll-over its contracts every month, in effect selling its about-to-expire position and purchasing new contracts for the following month. In a contango market, where future-month contract prices exceed near-month contract prices, such a strategy loses money every month. Thus, even when natural gas prices rise, UNG can lose money because the future contract price will rise at least as quickly as the current price.

Why own such a thing? Primarily as a hedge against inflation and almost no correlation with equity prices. Pretty small beer, all things considered. UNG is trading at $11.93 at about mid-day, within a 52-week range of $10.02-$17.68.

The First Trust ISE-Revere Natural Gas Index Fund (NYSE: FCG) tries to replicate the ISE-Revere Natural Gas Index by investing at least 90% of its funds in the common stock of that index’s companies. The fund’s top five holdings are Stone Energy Corp. (NYSE: SGY), Petrohawk Energy Corp. (NYSE: HK), Cabot Oil & Gas Corp. (NYSE: COG), Southwestern Energy Co. (NYSE: SWN), and SandRidge Energy, Inc. (NYSE: SD). These five comprise 18.95% of the fund’s holdings. The fund’s assets total $586 million and it is trading today at $21.19, within a 52-week range of $14.39-$23.75. In the past year, the fund has gained more than 30%.

The SPDR S&P Oil & Gas Exploration and Production (NYSE: XOP) invests in equities  of companies that explore for and produce oil and natural gas. The fund’s top five holdings are Cabot, W&T Offshore, Inc. (NYSE: WTI), Petrohawk, EQT Corp. (NYSE: EQT), and Southwestern Energy. The fund’s assets total $908 million. The fund is trading at $56.55 today, within a 52-week range of $37.44-$65.76. Over the past year, the fund has gained about 42%.

The PowerShares Dynamic Oil & Gas Services Fund (NYSE: PXJ) tracks an equity index called the Dynamic Oil Services Intellidex. It invests at least 80% in common stock of oil and gas services companies, and may invest up to 90% of its assets in the Intellidex index companies. Its five largest holdings are Baker Hughes Inc. (NYSE: BHI), Nabors Industries, Ltd. (NYSE: NBR), Halliburton Co. (NYSE: HAL), FMC Technologies, Inc. (NYSE: FTI), and Diamond Offshore Drilling, Inc. (NYSE: DO). The fund’s assets total about $247 million and it is trading today at $23.35, in a 52-week range of $13.98-$26.84. The fund has gained about 66% in the past year.

A reasonable conclusion from this quick survey is that investing in natural gas producers pays off nicely, but the real gains have come in the services sector. Holding natural gas futures has very limited appeal, but plenty of investors do it.

Growth in the services sector is likely to continue as drilling picks up both onshore in the US and offshore in the US Gulf of Mexico. As for the producers, Cabot, Stone, and Petrohawk are all involved in natural gas plays that produce significant amounts of liquids. And that’s where the money is, not in gas. Gas may become worth more over the next year or so, but the price differential between liquids and gas is never likely to close again.

Paul Ausick

The Arkansas Geological Survey does not see a correlation between production wells and the quakes, but it’s not so sure about the injection wells that are used for long-term storage of the wastewater generated by the hydraulic fracturing procedures used to extract the gas. Water used for the fracturing is recycled and re-used several times before becoming too dirty for further use. At that point, it is injected under high pressure into a well where it is intended to be stored essentially forever.

Local residents believe that the injection wells are causing the quakes, and the state has issued a six-month moratorium on drilling new injection wells while it studies the issue. Four companies operate current injection wells, including a subsidiary of Southwestern Energy Co. (NYSE: SWN) and a subsidiary of Chesapeake Energy Corp. (NYSE: CHK), which recently sold all its Fayetteville shale assets to BHP Billiton (NYSE: BHP) for $4.75 billion.

While it may seem far-fetched to believe that the injection wells are the cause of these earthquakes, there is precedent. In late October of 2008, the Dallas-Fort Worth airport (DFW) experienced a number of quakes in an area where no earthquakes had ever been recorded before. A team of researchers from the University of Texas at Austin and Southern Methodist University analyzed seismograms of the DFW quakes and concluded, “On the basis of time and spatial correlations, we conclude the DFW sequence may be the result of fluid injection at the [salt water disposal] well, but we are puzzled as to why earthquakes occur at this particular location but not near other [salt water disposal] wells in the region.”

The Dallas-Fort Worth area is home to the Barnett shale gas play, the first major shale gas deposit to be exploited in the US. There are more than 200 salt water disposal wells actively in use in the area. Only a couple of locations experienced any earthquake activity, and the ground movement was quite small — less than an inch after the largest of the quakes, which registered a magnitude of 3.3. The recent quakes in Arkansas have also been relatively minor, with the exception of a 4.7 magnitude quake that occurred on February 27^th.

In the DFW case, once two injection wells near the airport were shut down, the quakes stopped. No injection wells have been shut-in yet in Arkansas.

The Arkansas quakes are probably not strong enough to cause any damage to the pipelines and gathering systems in the area. And while that is definitely a concern for residents, a more compelling concern is what is causing the quakes. If it turns out that the injection wells are at least a contributing factor, there are likely to be demands that the injection wells be shut-in.

If the injection wells are shut-in, then the wastewater will have to be disposed of either in evaporative pits or trucked to some other location for disposal. Both methods are more costly and potentially more environmentally damaging than the injection wells.

Paul Ausick

A123 Systems Inc. (NASDAQ: AONE) Raised to Neutral at BofA/ML.
Boston Scientific Corporation (NYSE: BSX) Raised to Outperform at RBC.
Chesapeake Midstream Partners, L.P. (NYSE: CHKM) Raised to Buy at BofA/ML.
Deckers Outdoor Corporation (NASDAQ: DECK) is Bull of the Day at Zacks Investment Research.
General Motors Co. (NYSE: GM) Reiterated Buy at Argus.
Las Vegas Sands Corp. (NYSE: LVS) Raised to Outperform with $56 target at Credit Suisse.
Liberty Global Inc. (NASDAQ: LBTYA) Cut to Underperform as Bear of the Day at Zacks Investment Research.
Netgear, Inc. (NASDAQ: NTGR) Raised to Buy at By S&P Equity Research (late-Monday call).
Range Resources Corporation (NYSE: RRC) Cut to Market Perform at FBR.
SAP AG (NYSE: SAP) Started as Underperform at BNP Paribas.
Southwestern Energy Co. (NYSE: SWN) Cut to Underperform at BofA/ML.
Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM) Raised to Overweight at HSBC.
Windstream Corporation (NASDAQ: WIN) Raised to Buy at Citigroup.

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JON C. OGG

Large natural gas companies,  such as Chesapeake Energy Corporation (NYSE: CHK), Southwestern Energy Company (NYSE: SWN), Apache Corp. (NYSE: APA), Devon Energy Corporation (NYSE: DVN) and even Exxon Mobil Corp. (NYSE: XOM), are all now potential buyers of GE’s new mobile evaporator.

The new mobile evaporator is represented as being energy efficient, fully transportable, cost effective and that it will enable onsite frac water recycling.  If this works the way it is described, then GE is offering a new solution to reduce wastewater volume and fresh water that needs to be hauled to and from each well site that is highly needed.

Hydraulic fracturing, or fracking, is potentially one of the largest environmental  problems when it comes to extracting natural gas from the earth.  The process involves creating small fractures in the rock surrounding the reservoirs to allow natural gas and oil to flow out.  The process increases the production rate of oil and gas wells, but it is also highly controversial because many argue that it destroys natural water systems.

GE’s mobile evaporator is meant to treat the severely impaired waters, such as frac flowback and produced water.  The system is also geared to allow the reuse of the water in the industrial process, reduce fresh water volume consumed, and is meant to cut down on the environmental impact from discharge.

The target here is all unconventional gas and frac water applications in regions of the world where shale gas can be found, including North America, Europe, China and Indonesia. Initial applications will be in various North American markets such as the Marcellus Shale reservoirs in the Appalachian Basin.

The Marcellus Shale produces very high total dissolved solids frac water and this solution gives natural gas producers a way to cut down on water transportation and disposal costs. The mobile evaporator is “a 50-gallon per minute, horizontal, shell and tube, forced circulation, mechanical vapor recompression system.”

More importantly, the evaporator is said to remove nearly all of the impurities in the water, allowing producers to easily meet the newly passed Pennsylvania discharge regulations of less than 500 TDS.  GE noted that this is the first time that the technology used for the treatment of shale gas frac water has been completely mobilized.

One-product solutions for a company the size of GE will not make or break the company.  After all, GE has thousands of products and is vastly diverse.  The difference here is that this addresses one of the key issues for natural gas and oil drillers that are often accused of wrecking the environment.  There have been many documentaries and many reports on how damaging this fracking process can be.

If GE’s new solution works as well as it sounds, there is an assured built-in demand for the product.  It is not even out of the realm of possibilities that many local communities could demand that the system becomes adopted at all wells in their jurisdiction.  Of course that is speculation, but this new GE product could actually have a built-in demand with significant benefits to local communities where the drilling process is harmful to the environment.

An article from BizJournals.com via the Houston Business Journal outlines just how critical the unintended consequences can be from the fracking process.  There is even a documentary called GasLand that highlights the damage and risks from fracking.

A Texas study from the Perryman Group in 2008 noted that there were a total of 7,170 gas wells across the Barnett Shale region alone and that 541 were located inside the Fort Worth city limits.  A report from the Pittsburgh Post-Gazette in June 2010 also showed that in this year alone, the DEP had issued 1,985 new Marcellus drilling permits and it noted that some 763 wells are either completed or under construction.

As far as the total product opportunity, it is huge.  Whether the large gas companies buy this is not known, but there are literally hundreds upon hundreds of potential customers.  The EIA has a table with the most recent data being 2008, but it shows that the U.S. had 363,107 oil wells and 460,261 gas wells.  GE may have a real winner here in this new product.

JON C. OGG

BP plc (NYSE: BP) target cut at HSBC; Cut to Hold at UniCredit; Moody’s cut the debt rating; BP was also raised to Buy at Societe Generale.
Franklin Resources Inc. (NYSE: BEN) Cut to Neutral at Goldman Sachs.
Invesco Ltd. (NYSE: IVZ) Started as Buy at Goldman Sachs.
Lincare Holdings (NASDAQ: LNCR) Cut to Hold at Jefferies.
The Kroger Co. (NYSE: KR) Cut to Underperform at BofA/Merrill Lynch.
Koninklijke Philips Electronics NV (NYSE: PHG) Raised to Buy at BofA/Merrill Lynch.
Safeway Inc. (NYSE: SWY) Cut to Underperform at BofA/Merrill Lynch.
Southwestern Energy Co. (NYSE: SWN) Cut to Neutral from Conviction Buy List at Goldman Sachs.
Tesoro Corporation (NYSE: TSO) Raised to Sector Perform at RBC.
Willams Cos. (NYSE: WMB) Raised to Conviction Buy List at Goldman Sachs.

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JON C. OGG

Cramer also called the deal announced today where Chesapeake Energy Corporation (NYSE: CHK) where Total SA (NYSE: TOT) will pay $2.25 billion for a 25% stake in Chesapeake’s Texas Barnett Shale.  Cramer believes this is no surprise after the recently announced deal for XTO Energy (NYSE: XTO) by Exxon Mobil Corp. (NYSE: XOM).  Other natural gas and crude E&P players Cramer touted were Devon Energy Corporation (NYSE: DVN), Southwestern Energy Co. (NYSE: SWN), Apache Corp. (NYSE: APA), Continental Resources Inc. (NYSE: CLR), and Range Resources Corp. (NYSE: RRC).  Cramer even said he still likes Linn Energy, LLC (NASDAQ: LINE) except it is up 70% and probably shouldn’t be chased.  On the integrated oil players, Cramer noted Chevron Corp. (NYSE: CVX) and Marathon Oil Corporation (NYSE: MRO) were the stocks he briefly noted.

Cramer featured a speculative stock pick for making engines that run on natural gas and alternative energies is Westport Innovations Inc. (NASDAQ: WPRT). The company lost money and is partnership-dependent, funding investments and may need to raise capital.  But the CEO, David Demers said “We need a new fuel” and the company has very deep partnerships with Cummins Inc. (NYSE: CMI) and with Volvo.  Westport makes engines for buses, class-A trucks, garbage trucks and more.  Cramer said he’d stick with this one as a fair trade, but still maintains that it is a speculative stock.

Clean Energy Fuels Corp. (NASDAQ: CLNE) was briefly mentioned as the stock play for natural gas fuel stations.  This was not mentioned for very long, but this is the T. Boone Pickens play for powering trucks on compressed natural gas.

On the natural gas plays, Cramer noted how natural gas needs more lobbying, is 30% cleaner than oil, and is 40% cleaner than coal.  He also noted how there is already 100 years worth of natural gas power already in the ground.

We have been checking the calls of many pundits for 2010 stock picking, and not just in oil and gas.  This weekend we ran a pick list covering every major financial site’s stock picks for 2010.  We have also featured the best of the DJIA 30 stocks with the most implied analyst upside for 2010.

I would like to personally invite you to join in with the thousands of readers on our free daily email distribution list from 24/7 Wall St. to hear about ongoing day trader and options trader alerts, analyst upgrades and downgrades, stock and market rumors, Buffett and guru investor news, M&A and IPOs, and more.

Jon C. Ogg
January 4, 2010

All told, Chesapeake will pay out about $50 million in dividends, whichis not all that much for a company with a market cap of about $9.5billion. Still, given all Chesapeake’s recent cash flow troubles, it doesn’tmake an awful lot of sense to send more money out the door.

Of course, the market sees it differently. Chesapeake’s share price is down over 2% on the news.

Paul Ausick
December 15, 2008

Last quarter Range Resources reported net income of $285 million, anincrease of 384% from the same quarter in 2007. A miracle? No, anon-cash revenue from derivatives of $299 million. It’s also true thatthe company increased its production to 388 million cubic feetequivalent/day, on its way to an planned 400 million cubic feetequivalent/day for the current quarter. But natural gas prices keepfalling, so producing more just doesn’t look like a winning strategy.

The company’s cash position is not all that attractive either: At theend of last quarter, the company had less than $60 million in cash andinvestments, and almost $1.2 billion in long-term debt. Falling priceswon’t cure that.

As for Southwestern, it didn’t get a similar bump from its derivatives,but it did sell $240 million worth of properties, some $220 million ofwhich was booked in the third quarter. Southwestern also sold its lastlocal distribution company in July and booked a pre-tax gain of $57.3million on that sale in the third quarter. The company’s net income forthe quarter was about $218 million, up 328% from the previous year.

Southwestern’s production was also way up in the third quarter onhigher volume and higher prices. But natural gas and crude oil priceshave been dropping, and Southwestern’s cash position shows about $67million in cash and short-term investments against about $992 millionin long-term debt.

The downgrade to Devon Energy shares again reflects today’s realitythat good operational performance and substantial assets don’t countfor as much as the volatile price of crude. Crude prices have jumpednearly $3.50 this morning, raising Devon’s shares nearly 2% in earlytrading. When crude prices drop again, so will Devon’s share price.

The price rise in crude results from expectations that OPEC will cutproduction by another 2 million b/d. That will push prices up, butprobably not for long. If OPEC tries to move prices up to July levels,the cartel simply contributes to the deflationary pressure on theglobal economy, which leads to lower prices. Then the weakest OPECmembers, like Iran and Venezuela, can only suffer domestic troubles orpump more oil at lower prices. Either way it’s a losing strategy.

As we’ve noted elsewhere this morning, a crude price increase to around $70/b lets exporters make a profit without holding a gun to consumers’ heads.

Paul Ausick
December 15, 2008

A subsidiary of Southwestern Energy (NYSE:SWN) has signed up for 1.2billion cubic feet/day for 10 years and a subsidiary of Chesapeake(NYSE:CHK) has signed on for 375 million cubic feet/day with an optionfor another 125 million cubic feet/day. FEP will start a binding openseason next week to determine if there is enough demand for shipping towarrant an increase to the planned pipeline.

Southwestern Energy was the first company to apply the horizontaldrilling techniques developed in the Barnett Shale play to theFayetteville Shale. The company holds leases on more than a 900,000 netacres of the play, of which only about 150,000 have been developed. Inits last annual report, Southwestern estimated its proved reserves inthe Fayettville play at 716 billion cubic feet equivalent, of which 43%is developed. That leaves a lot of room for growth.

Chesapeake has been shedding assets, including a25% stake in its Fayetteville Shale holdings to BP plc (NYSE:BP). Thecompany noted in its 2007 annual report that it planned to sell offabout $3 billion in assets through 2009 in order to avoid having to goto the public markets for cash to fund capex. That may still prove tobe a sound plan, given the fear gripping the credit markets today.

As usual, though, the pipeline companies have probably hit on anotherwinner here. Some estimates of the total Fayetteville Shale resourceare as high as 20 trillion cubic feet of natural gas. It will take morethan 20 years to pump it all out, and both Kinder Morgan and EnergyTransfer will nick off just a little bit of every cubic foot. That’s agood business model.

Paul Ausick
October 1, 2008