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The stars begin to align for natural gas Add to ...

Companies from around the world have been pushing into natural gas as they try to increase production of this promising source of energy. A string of deals this year, such as Encana Corp.'s quarter-billion-dollar (U.S.) joint venture with Northwest Natural Gas Co. and PetroChina's $5.4-billion investment in Encana's shale gas assets, has thrown a spotlight on natural gas's potential.

It's a trend that is only likely to get more pronounced as time goes by. Technological enhancements have made gas much easier - and cheaper - to produce, and the tragedy in Japan and continued upheaval in oil-producing Middle East nations should make natural gas an attractive alternative to oil and nuclear power.

The U.S. and Canada are the largest and third-largest natural gas producers in the world (with Russia in between) and stand to benefit from natural gas finding favour.

What about investors? As with any industry, some companies will be able to take advantage of the situation, while others will fall by the wayside.

With that in mind, I recently used my Guru Strategies (each of which is based on the approach of a different investing great) to find some attractive natural gas stocks that are based in Canada and the United States or have entered into partnerships with North American firms. Here are a few that look particularly intriguing right now.

Encana Corp. :

Encana has been quite active in forming exploration and production partnerships since it spun off its oil business in 2009 and focused on natural gas.

It recently backed off its gas focus a bit, however, saying that it would concentrate more of its growth efforts on crude oil and natural-gas liquids, since natural gas prices have languished and oil prices are surging. But the firm is still a power in the natural gas arena, as Canada's largest producer.

The strategy I base on James O'Shaughnessy's cornerstone value quantitative model sees any sluggishness in its shares as a good buying opportunity. This approach looks for large companies with strong cash flows and solid dividend yields, and Encana fits the bill.

The $23-billion (Canadian) market-cap firm is plenty big enough, and it's also producing $6.00 in cash flow per share, far more than the market mean ($1.17). It's also yielding 2.5 per cent, good enough to pass this strategy's dividend test.

CNOOC Ltd. :

CNOOC is short for Chinese National Offshore Oil Corp., but the firm has significant natural gas operations as well. China has been making a big push into natural gas-related investments in recent years. CNOOC recently reached a deal worth more than $2-billion (U.S.) to acquire one-third of Chesapeake Energy's Eagle Ford (Texas) shale.

CNOOC, with a $105-billion market cap, is a favourite of my Warren Buffett-based Guru Strategy. The Buffett-based approach looks for firms with lengthy histories of persistent earnings growth, manageable debt, and high returns on equity (which is a sign of the "durable competitive advantage" Mr. Buffett is known to seek).

CNOOC delivers on all fronts.

Husky Energy Inc. :

Husky has significant natural gas operations, marketing more than 600 million cubic feet per day to Canada and the U.S. Over the past year, the $25-billion (Canadian) market-cap firm has taken in more than $18-billion in sales.

Husky gets approval from my O'Shaughnessy-based model. The approach likes Husky's size, solid $4.16 in cash flow per share, and 4.1-per-cent dividend yield.

These three firms look to be fundamentally sound investments in the natural gas space and they all pay out healthy dividend yields. So you get paid to wait as natural gas advances and becomes more important - and more profitable - in serving our long-term energy needs.

John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the Omega Consensus funds. Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.

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