The globeandmail.com is reporting how EnCana's hedging strategy "backfired" as the company recently hedged 40% of its expected 2008 natural gas production at around $8, while prices for natural gas are currently over $10. The impact of the hedging showed up in Encana's first quarter results as profit plunged to $93 million from $497 million a year earlier, with the decrease in the first quarter resulting from unrealized hedging losses. While Encana's 2008 hedges have not expired, mark-to-market accounting generated the balance sheet losses as natural gas prices moved above the original $8 contract price. Also mention is how the Encana executives are "looking on the bright side" as the higher prices have helped the 60% of their production that is not hedged.

As usual, it is interesting how hedging is considered to have backfired when it turns out that you would have been better off being without a hedged position. Of course, if it had turned out that $8 was the top, and Encana was selling the majority of its 2008 production for $6, then the same authors, and many shareholders, would be wondering why the company did not lock into prices when they were so high. Rather than seeing a "backfired" strategy, Encana's approach to managing their business appears sound and stable, and less risky and foolish than one might expect.

Tickers: ECA

As a general rule of thumb, crude oil has traditionally traded at a 7-8 multiple to natural gas, or put another way, natural gas trades at a 7-8 times discount to crude. With May crude contracts hitting $116.69 a barrel, and May natural gas contracts at $10.587 mmBtu, is the traditional 7-8 crude oil to natural gas multiple breaking down, or will we see a correction soon? Given the current price of crude, natural gas should be trading somewhere in the range of $14.586 to $16.670. Does this make natural gas a possible trade? It depends on two things. First, do you believe the crude oil / natural gas multiple is valid during a period of increased volatility? Second, will crude continue its march to $120 and beyond, or at least stay above $100 per barrel. Given the beginning of the summer driving season, and the published supply and demand constraints, a price for crude staying over $100 a barrel through the summer seems possible. Even at $100, natural gas should approach $12.5 mmBtu on the low end with the 8 multiple. Recent natural gas finds will add some relief, but this supply will take a while to materialize. Increased use of natural gas to fuel power plants, driven by both environmental concerns with coal and safety concerns with nuclear (both interesting plays in and of themselves), will put further pressures on natural gas supply.

While futures are a natural position, many traders have a bias or preference for equities. Fortunately, numerous stocks with natural gas exposure exist, many of which also include exposure to crude oil. A few of interest including the following:

Anadarko (APC, $68.90, P/E 8.53, Market Cap 32.25B): Involved in exploration, development, and production of oil and natural gas, with proved reserves of 8.5 trillion cubic feet of natural gas. The company is buying back shares and paying down debt, with the stock price currently in an up trend.

Apache (APA, $142.51, P/E 16.99, Market Cap 47.45B): An independent energy company engaging in exploration, development, and production of oil and natural gas, with proved reserves of 14.7 trillion cubic feet of natural gas. The company has a dependent on crude oil prices more than some purer plays, even beyond any multiples. The stock is currently in an up trend.

Canadian Natural Resources (CNQ, $84.50, P/E 17.70, Market Cap 45.65B): The second largest oil and natural gas producer in Canada with proved reserves of 3.8 trillion cubic feet of natural gas. Operating expenses have been a worry, and the stock is strongly levered to oil in addition to natural gas. The stock is currently hitting upper resistance, with a potential double top.

Chesapeake Energy (CHK, $50.39, P/E 19.23, Market Cap 25.90B) An oil and natural gas exploration and production company with 10.879 trillion cubic feed equivalent of proved reserves. As discussed before, Chesapeake Energy is the second largest independent producer of natural gas in the U.S., and recently announced new natural gas discoveries. The company is expecting output increases of 21% this year, and 16% next year. The CEO, Aubrey McClendon, is also increasing his position in the company, purchasing another 1.5 million shares recently, raising his stock total to $1.2 billion. He also recently stated how the impact of the Fayetteville Shale could total $18 billion over the coming decade. Obviously, he believes the natural gas story, as well as his company's prospects. The stock is in an up trend.

Devon Energy Corporation (DVN, $118.40, P/E 14.82, Market Cap 52.62B): Involved in exploration, development, production, and transport of oil and natural gas with proved natural gas reserves of 8,994 billion cubic feet and 321 million barrels of natural gas liquids. Recently, the stock is in a strong up trend.

El Paso Corporation (EP, $17.62, P/E 11.48, Market Cap 12.35B): A natural gas exploration, production and transmission operations company, with an estimated 2.9 trillion cubic feet of natural gas equivalents of proved natural gas and oil reserves. The stock is nearing overhead resistance.

Encana Corporation (ECA, $86.23, P/E 16.65, Market Cap 64.69B): Exploration, production, and marketing of natural gas, crude oil, and natural gas liquids. Largest natural gas producer in Canada with 13.3 trillion cubic feet of natural gas. The stock is in an up trend.

EOG Resources (EOG, $134.17, P/E 30.67, Market Cap 33.14B): Exploration, production, and marketing of natural gas and crude oil, with estimated net proved reserves of 6,669 billion cubic feet of natural gas. The stock is in a strong up trend.

Equitable Resources (EQT, $67.96, P/E 32.42, Market Cap 8.30B): Equitable operates an integrated energy company in the Appalachian area, with natural gas production, distribution, and transportation activities, with approximately 2,682 billions of cubic feet equivalent of natural gas. EQT is in a recent up trend.

Noble Energy (NBL, $90.55, P/E 16.63, Market Cap 15.56B): Involved in exploration, development, production, and marketing of crude oil and natural gas in the U.S., with proved reserves of 3.3 trillion cubic feet. The stock is in an up trend after recently coming out of a trading range.

Petroleum Development Corporation (PETD, $77.14, P/E 34.47, Market Cap 1.15B): Involved in acquisition, development, production, and marketing with proved reserves of 593,563 million cubic feet of natural gas. The stock is in an up trend.

Quicksilver Resources (KWK, $41.48, P/E 14.48, Market Cap 6.57B): Independent energy company engaging in acquisition, exploration, production, and sale of natural gas, natural gas liquids, and crude oil, with proved reserves of 1.5 trillion cubic feet equivalents of natural gas. The stock is in an up trend.

Range Resources Corporation (RRC, $71.60, P/E 46.55, Market Cap 10.73B): Involved in exploration, development, and acquisition of oil and gas properties, with approximately 1,125,410 million cubic feet of natural gas reserves. The stock is in an up trend.

XTO Energy (XTO, $67.57, P/E 19.14, Market Cap 34.48B): Company involved in acquisition, development, and exploitation of natural gas properties, with proved reserves of 6.94 trillion cubic feet of natural gas. Recently agreed to pay $600 million for Linn Energy. The company also recently priced $2 billion in senior notes. The stock is currently in an up trend.

From the list, APC, APA, CNQ, CHK, ECA, EQT, and XTO all seem to be on the radar of just about everyone, as these stock are often mentioned by analysts on TV, in the print media, and discussed on the blogs. Each also has a relatively/historically high P/E (each over 16, with the exception of Anadarko). Nonetheless, if the 7-8 multiple holds, those stocks levered more to natural gas, such as Chesapeake, could see even higher valuations.