Many investors are very confident in the long-term bullish case for energy stocks, but what if this confidence is misplaced? With oil prices heading lower and natural gas prices staying stuck below the $4 per Mcf mark, this may well be the case. As such, investors might be wise to stick with the exploration and production companies that have exposure to North American oil and gas plays, which are still economical at these lower prices. Let's take a look at a few players in North American exploration and production. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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Haynesville/Bossier
This emerging shale play that straddles the Louisiana-Texas border clearly works at a lower natural gas price. A report written by Morgan Stanley (NYSE:MS) in March 2009 said that the Deep Bossier (East Texas) and Haynesville (Louisiana) would still earn an operator a 10% internal rate of return with a natural gas price of $3.50 per Mcf.

The biggest beneficiaries here would be the exploration and production companies with the largest acreage positions, including Chesapeake Energy (NYSE:CHK), XTO Energy (NYSE:XTO) and Petrohawk (NYSE:HK). These companies have 470,000, 100,000 and 300,000 net acres under lease in these areas, respectively. If natural gas prices stick lower for longer than expected, these companies have plenty of acreage to direct capital toward.

One non-shale play that works at a lower price is the Pinedale Field in Wyoming, which, according to the same study, takes a $3.60 per Mcf price to earn a 10% return. The two kings of this basin are Ultra Petroleum (NYSE:UPL) and Questar (NYSE:STR). Ultra Petroleum has more than 121,000 net acres in the Pinedale. Questar has proven reserves of 1.16 Tcfe on its Pinedale acreage.

One high-cost oil play is the Permian Basin. Cimarex Energy (NYSE:XEC) said during its first-quarter conference call that it was reducing drilling here due to low prices and high costs. "We wound up cutting our drilling program there back severely because the oil prices were headed down and the costs were really high," said CEO F.H. Merelli. The company has since restarted some limited drilling due to the bounce in oil prices.

One thing to consider is that studies like this are general, because all exploration and production companies have different costs structures, even when operating in the same basin. Also, as service costs come down, the exploration and production companies will earn the 10% return at a lower natural gas price.

The basin that requires an $8.50 per Mcf gas price is the Tier 3 portion of the Barnett Shale. The Tier 2 is not much better and requires a $6.90 per Mcf gas price. The Texas Railroad Commission, which regulates oil and gas activity in Texas, defines the core area of the Barnett to be in Denton, Johnson, Tarrant and Wise counties. The other 14 counties in the Barnett are classified as non-core.

Bottom Line
Although energy bulls seem confident that oil and natural gas prices will once again reach the levels seen before the recession and financial crisis, they were just as confident when oil was at $147 a barrel last summer. Investors might want to hedge their bets slightly by owning companies with exposure to basins that are economical at current prices. (Learn more about factors that affect oil prices in What Determines Oil Prices?)

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