A Closer Look at... EOG Resources Inc., Nicor Inc., and NiSource Inc.

              

Despite the end of winter weather right around the corner, traders' interest in the natural gas sector has yet to abate. Specifically, the NYSE ARCA Natural Gas Index (XNG) has soared an impressive 89% since reaching a low in March 2009. The index has skipped higher along the support of its ascending 10-week and 20-week moving averages, taking out potential resistance at its 160-week trendline. What's more, after rebounding from support at its 160-week moving average and the psychologically significant 500 level in early February, XNG is now poised to once again challenge a 52-week high the shares set in early January.

Despite this solid technical strength, options players remain complacent toward the sector. The composite Schaeffer's put/call open interest ratio (SOIR) for the natural gas sector comes in at 0.62, near the midpoint of its annual range. Meanwhile, nearly half of the ratings levied against XNG components are "holds" or worse. Given the group's solid uptrend, an unwinding of this lingering pessimism could provide additional buying pressure for natural gas stocks.

EOG Resources Inc. (EOG)

Not all XNG members are blanketed in complacency, however. In fact, EOG Resources Inc. (EGO) has been the focus of growing skepticism among options players. According to Hoover's, EOG is an independent oil and gas company engaged in exploring for natural gas and crude oil and developing, producing, and marketing those resources. The company operates in Canada, offshore Trinidad, the U.S., the U.K. sector of the North Sea, and in China.

The security has been in a strong uptrend along the support of its ascending 10-week and 20-week moving averages since March 2009. In fact, the equity has gained a whopping 118% during this time frame. The shares are currently in the process of rebounding from support near their 20-week moving average, and are poised to make another run at short-term resistance at the 100 mark.

Despite the stock's impressive technical uptrend, options players remain skeptical of the shares. For instance, the stock's SOIR of 0.87 ranks above 75% of all such readings taken during the past year. In other words, short-term options speculators have been more skeptical of the shares only 26% of the time during the past 52 weeks.

Elsewhere, short sellers are loading up on bearish bets. During the past month, the number of EOG shares sold short spiked nearly 30% to account for 4.32 million shares. Despite this added selling pressure, EOG has extended its rally higher, underscoring the level of buying pressure currently supporting the security. What's more, if the equity manages to break out above the century mark, we could see these bears flee for the exits. As such, EOG stands to benefit from the ensuing short-covering rally.

Finally, Wall Street analysts are also firmly set against EOG. Currently, 14 of the 22 brokerage firms following the shares rate them a "hold" or worse. This bearish configuration creates ample opportunity for potential upgrades that could lend additional buying strength to EOG shares. A July 95 call would allow a trader to capitalize on a continued rally in the shares.

Nicor Inc. (GAS)

Another interesting stock in the natural gas sector is Nicor Inc. (GAS). The firm has 34,000 miles of mains and service pipes that distribute natural gas to about 2.2 million residential, commercial, and industrial customers in Illinois, according to Hoover's. The company obtains its supply through long-term contracts and on the spot market. Nicor also operates the Chicago Hub, which provides natural gas storage and transmission-related services to marketers and other gas distribution companies.

From a technical perspective, the equity has skipped roughly 50% higher during the past 52 weeks, gaining ground along the support of its 10-week and 20-week moving averages since March 2009. Currently, the shares are challenging resistance near the 43 area, a region that rejected GAS in late December 2009. Should the shares break out above this short-term technical hurdle, it could signal long-term strength for the shares.

Meanwhile, short-term options players are skeptical of the shares. The SOIR rests at 0.93, as put open interest is nearly in parity with call open interest among options slated to expire in less than three months. This reading is also higher than 80% of all those taken during the past 52 weeks. In other words, short-term options speculators have been more skeptical of the shares only 20% of the time during the past 12 months.

Outside the options pits, nearly 5% of the stock's float has been sold short. However, these bears may be in the process of unwinding their positions, as the number of GAS shares sold short dropped by 6.2% during the past month. A continuation of this short-covering trend could create additional buying pressure for the security.

Analysts have also failed to warm to GAS' uptrend. Specifically, seven of the eight brokerage firms following the shares rate them a "hold" or worse. What's more, Thomson Reuters reports that the 12-month consensus price target for GAS rests at $39.67 per share, a discount to the stock's close at $42.40 per share on Wednesday. Any upgrades or price-target increases could provide more fuel for GAS' continued uptrend. A July 40 call on GAS would allow traders to pocket a profit on a rally in the stock. As a caveat, options traders should be aware that open interest is quite thin on GAS.

NiSource Inc. (NI)

NiSource Inc. (NI) is the central energy provider for the Midwest, the South, and New England, according to Hoover's. The company's utility subsidiaries distribute natural gas to about 3.3 million customers in seven states over 57,000 miles of pipeline. NiSource also owns one of the largest natural gas transmission and underground storage systems in the U.S. (capable of storing 629 billion cu. ft. of natural gas), including a 16,000-mile interstate pipeline system.

Technically speaking, the security has gained 82% during the past 52 weeks, rallying steadily along support from its 10-week and 20-week moving averages. This strong price action pulled the stock's 10-month and 20-month moving averages into a bullish cross in January 2010 - a technical formation that often indicates additional upside potential. Currently, the shares are in the process of rebounding from support at their 20-week trendline, and are poised to challenge their 52-week highs near $16 per share, set in late December 2009.

Meanwhile, options players are far from confident that the stock has room to run higher, choosing to flood the equity with puts. NI's SOIR comes in at 0.53, arriving higher than 87% of all those taken during the past year. In other words, options traders have been more bearish only 13% of the time in the past 12 months.

The International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) have also seen a jump in put trading. During the past 10 trading sessions, more than three puts have been purchased to open for every one call purchased to open.

What's more, all 11 of the analysts following NI rate it a "hold," leaving the door open for potential upgrades. Traders should consider the stock's July 12.50 call to take advantage of a continued uptrend in the shares.