Exploring 3 Small Natural Gas Plays

Big oil and gas companies can cast a large shadow, hiding potential winners from our sights. Even an independent like Chesapeake Energy is a headline hog, so sometimes it pays to dig a bit deeper in the search for potential portfolio adds in the natural gas sector. Below are three such companies, all with market caps less than $2.5 billion.

Quicksilver Resources (NYSE: KWK) -- Sometimes, it's a cruel world for independent oil and gas companies. Quicksilver Resources had a tough third quarter and is an example of what can go wrong for a small natural gas producer when the commodity's price is so deflated. The company's shares fell 10% at the beginning of the month on the news of lower than expected earnings and declining production estimates. The drop plays only a small part in the pattern of the plunge Quicksilver has experienced this year:

Quicksilver Resources Stock Chart
Quicksilver Resources Stock Chart

Quicksilver Resources Stock Chart by YCharts

The company has lost 40% of its value and grossly underperformed the S&P since April. The future looks just as bleak; Quicksilver has $940 million in public debt that is callable between now and the end of next year. The company has decided to create an master limited partnership, which will raise funds in an IPO, borrow additional funds, and then buy up some of Quicksilver's Barnett Shale assets. Quicksilver will then turn around and use that money to pay off debt. I hope it goes well. Quicksilver is so cheap right now, it could be ripe for a potential buyout. It would certainly be less complicated.

PetroQuest Energy (NYSE: PQ) -- PetroQuest didn't have a stellar third quarter either, getting killed on low natural gas prices and higher lease operating expenses. That being said, there are two reasons I'm not as bearish on PetroQuest as I am on Quiksilver.

First, the company doesn't have anywhere near the debt load that Quicksilver does. Second, the price of oil and natural gas liquids are both up, coinciding perfectly with the company's new operation in the oil and NGL-rich Mississippi Lime play. Oil and NGLs accounted for 18% of PetroQuest's third quarter production. The company expects the same in the fourth quarter, but that number is bound to increase once the Mississppi Lime wells begin to come online. PetroQuest plans to begin drilling operations on its first well there at the end of this year.

EV Energy Partners (Nasdaq: EVEP) -- Here's a company that did have a great third quarter, as income from core operations jumped 111% to $13 million. The Barnett Shale was kind to EV Energy Partners this quarter and natural gas production rose 48%. The good feelings over the Barnett were such that the company picked up another $975 million in assets from EnCana (NYSE: ECA) .

However, I urge caution celebrating this move as anything other than a long term investment. Though the Barnett has a ton of gas, many companies are moving out of the play in search of more lucrative oil and natural gas liquids. A more favorable near-term position may be the company's stake in the Utica Shale, a play that is expected to be rich in oil and natural gas liquids. The Ohio Department of Natural Resources has indicated the Utica Shale may hold between 1.3 and 5.5 billion barrels of oil and 3.8 to 15.7 trillion cubic feet of natural gas.

Foolish takeaway
Not every energy company is going to be a winner, but as PetroQuest Energy shows us, a bad quarter doesn't preclude hope for the future either. I like the small-cap's potential enough to make a CAPSCall on it right now.