Natural gas prices have remained subdued for so long that critics have started to write off the entire sector and companies operating in it. Falling profits and as a result, falling stock prices, are testimony that analysts were not wrong in peddling the idea of excess capacity built up in the past.

Most players are still surviving as natural gas is but one part of their overall business operations. Current stock prices of companies like EXCO Resources Inc (NYSE: XCO), Questar Corporation (NYSE: STR), and Clean Energy Fuels Corp (NASDAQ: CLNE) which have substantially high reliance on natural gas are trading at only a fraction of their highs seen a couple of years back. This is despite the fact that these stocks have moved up in recent months with soaring markets.

Natural Gas

Down but not out

There is little to no doubt that the situation is pretty bad for natural gas stocks but this sordid story too has a silver lining. As production overkill is keeping the prices depressed, a number of end users have already started taking advantage of unprecedented prices while many other are in the process of doing so by finding newer applications.

Natural gas has largely replaced coal in power generation plants and now it appears it could dominate of transportation industry. Prominent among these is automaker General Motors Company (NYSE:GM) whose chief executive recently said his company is scaling production of vehicles running on compressed natural gas.

GM is not alone in its thinking that as other auto executives have also hinted at boosting their research budgets for such technology even as the North American hydrocarbon revival is unfolding. Meanwhile, locomotive manufacturers General Electric Company (NYSE:GE) and Caterpillar Inc. (NYSE:CAT) are developing natural gas-powered models with a view of getting rid from diesel.

Waiting for the shift

As and when this shift occurs, companies like EXCO Resources Inc (NYSE: XCO) stand to benefit. EXCO is engaged in exploration and production of natural gas in the southern states of Texas and Louisiana. With a 14.6 percent drop in its latest quarterly revenue and wider losses, financial performance is nothing to talk about.

However, notable improvements were seen in terms of limiting its cash burn rate. At the same time, the company has boosted its quarterly dividend by 25 percent. Probably taking cues from these small operational improvements and generally positive markets, the stock has advanced 24 percent during the last month but still remains way below its 52-week high of $9.1.

Questar Corporation (NYSE: STR) is an integrated natural gas play that operates 2,500 miles of pipeline and serves 900,000 customers in Utah, Wyoming and Idaho. Being an integrated player has shielded the company from the ill effects seen in other industry players. Revenue growth and profitability metrics have essentially stayed flat over the last year; however, looking at the carnage in natural gas prices, this is also quite commendable.

The company is profitable and has been paying dividend for the last 40 years. The stock has moved in a narrow range between $16.92 – $23.95 over the year, which makes it a safe bet for risk-averse investors.

On the other side of the spectrum, Clean Energy Fuels Corp (NASDAQ: CLNE) is a fully-fledged retail play in the space. As of Dec. 31 2012, the company operated 348 natural gas fueling stations in 32 states, and has nearly 650 fleet customers with 30,600 natural gas vehicles. Truck fleets are already one of the largest customers of the company but sales to commercial vehicle fleets are further expected to increase as better suited engines from Volvo and Cummins are made available towards the end of the year.

Clean Energy Fuels has maintained strong topline growth and this was once again visible in it 15 percent jump in revenues to $99 million for the December quarter. Margins have been erratic though as the company continues to invest in the network build-up. However, the stock looks attractive at $13.6 after losing 43 percent over the last year.

Although it is not known with surety when a recovery in demand will boost prices of natural gas, the market may be erring in placing high discounts on these stocks. While the current building of fuel infrastructure for the alternative fuel market is still lagging behind, consumers may surprise the market by jumping on the bandwagon once the infrastructure is in place.