What are the best natural gas stocks? Which ones will survive the supply glut and skyrocket? And which will flame out before the cycle turns?

Horizontal drilling and fracking have lead to a tremendous surge in the supply of natural gas. This has pushed prices to historic lows, which will cause many bankruptcies in the natural gas industry.

But after these companies go off line, the survivors will reap massive rewards. Natgas may be selling for $2 to $3 here but in the rest of the world it is selling for $12 to $15. In 2015, a liquid natural gas export terminal will be completed and allow producers to ship their $2 natural gas to the rest of the world and sell it for $15, leading to an explosion in profits.

The Best Natural Gas Stocks

The best natural gas stocks are the ones with the lowest lifting costs, largest reserves and strongest capital structures.

One such company that exhibits all three is Devon Energy. Another interesting company is Chesapeake Energy, which has recently attracted interest from Carl Icahn. But Chesapeake’s weakness may lie in its capital structure. It has massive reserves and a low lifting cost, but it is stuffed to the gills with debt.

Natural Gas Stocks to Buy

This is not individualized investment advice. But the best way to determine which the best natural gas stocks to buy is to simply eliminate those that are over leveraged. Until U.S. natural gas prices rebound, which is likely to happen after the opening of the LNG export terminal any company with too much debt can be hurt by the glut and forced into bankruptcy.

Liquid Natural Gas Stocks

One of the hottest areas will probably be natural gas liquids or liquefied natural gas. Some interesting stocks include:

Cheniere Energy which is building an LNG export terminal to ship $2 natural gas to the rest of the world where it is selling for $15, thus taking advantage of a simple arbitrage, buying low and selling high.

Teekay LNG Partners which is building tankers to ship LNG across the world.