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Stock Strategist

Low-Cost Gas Producers for Your Radar Screen

These narrow-moat companies are worth watching.

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In North America, we use natural gas to heat our buildings, fire our electricity plants, and fuel our industries. Gas production is truly a commodity industry--my furnace doesn't care if it's burning gas produced by  EOG Resources (EOG) in the Barnett Shale in Texas or  Compton Petroleum (CMZ) in Alberta, and I certainly wouldn't pay more for gas from a particular company.

If you're familiar with Morningstar's ideas on economic moats (if not, click here), it might surprise you to learn that we award many gas producers we cover our narrow economic moat rating. The first crucial part of these firms' economic moats is the stranded nature of the gas resource. Because it's gaseous at room temperature, gas must be transported by pipeline or in super-cooled liquid form on special tankers. This means that it's not easy for extremely low-cost gas from the Middle East to enter our markets, and North American gas producers are therefore somewhat protected from cheap imports. But that's not enough. We wouldn't think a gas producer had an economic moat if its production costs were high enough to outweigh the transportation cost disadvantage of Middle Eastern gas. Therefore, the second critical part of gas producers' economic moats is low costs. Generally speaking, if a gas producer has low enough operating costs that it can still generate returns on invested capital exceeding its cost of capital, then we award that firm our narrow moat rating.

Elizabeth Collins does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.