(FORTUNE Magazine) – The brutal winter may have left much of the country frozen under a blanket of snow, but it has only heated up the natural gas market. Even before the weather turned frigid, dwindling reserves and sluggish production had been pushing gas prices steadily higher for months. And in late February, with forecasters calling for continued cold, natural gas prices spiked to all-time highs.

Stocks in the sector have soared along with the commodity price. Since the market hit bottom on Oct. 9 of last year, in fact, the Amex Natural Gas index has rocketed 45%, compared with a mere 6.5% gain for the S&P 500.

Does that mean it's too late to get in on the gas-powered profit taking? Well, the pros have already made the easy money. For example, the BP Capital Energy commodities fund, run by oil and gas industry legend Boone Pickens, has risen an astounding 370% so far this year by betting on the strength of natural gas pricing. And Pickens says that his company's BP Capital Energy Equity fund, which goes long and short on stocks (and like the commodity fund isn't an option for average investors), has returned 115% this year with its own heavy wagers on natural gas.

But if the sector is no longer dirt-cheap, it hasn't priced out new investors either. "The group is below where it should be trading, given these prices," says analyst John Kartsonas of Standard & Poor's. And looking beyond the next few months, the industry should benefit from long-term trends and the simple laws of supply and demand.

A big factor is the increasing use of natural gas by electricity producers. According to the Department of Energy, virtually all of the increase in U.S. electricity output since 1999 can be attributed to gas. And supplies remain tight because gas is simply becoming hard to find. "Production has peaked," says Pickens. "I don't think it will ever recover to the highs of the past."

That's why even if, as expected, prices come down significantly once the winter passes and tensions with Iraq are resolved, natural gas prices are likely to settle around $3.50 per million BTUs--much higher than the $2 to $3 levels seen in recent years. The primary beneficiaries? Companies engaged in exploration and production of oil and gas.

With that in mind, we went looking for E&P companies that are likely to benefit from another industry trend--consolidation--and that aren't overly weighted toward the oil business, which promises to be volatile in the coming months. We found five worth discovering.

Based in Calgary, Canada, EnCana (ECA, $33) is North America's largest independent producer of natural gas and oil. The explorer has strong drilling assets and a balance sheet that make it the envy of other producers. Last year the company earned $859.4 million--and generated a whopping $2.6 billion in cash flow. And though it recently shelved a $724 million development project off the coast of Nova Scotia, it still has an impressive array of exploration successes, particularly in western Canada and the Rocky Mountains. "They have the ability to grow through acquisitions, and at the same time they also have a lot of great assets to help them continue growing through the drill bit," says analyst Amir Arif of Friedman Billings Ramsey.

EnCana is projected to grow at a 10% annual clip for the next few years, much higher than the industry average of 3% to 5%. And while Canadian companies have historically traded at a lower multiple than their American peers, that gap has been shrinking. Still, EnCana now trades at just five times its projected 2003 debt-adjusted cash flow, Arif says, compared with an average multiple of 5.4 for the sector.

The largest oil and gas producer south of the Canadian border is now Devon Energy (DVN, $48), by virtue of its late-February deal to buy fellow explorer Ocean Energy for $5.3 billion. The deal punctuates an acquisition run that has nearly tripled Devon's revenue since 1999. Adding Ocean's assets will extend Devon's already global reach and should boost its growth. "Ocean Energy has a great portfolio of deepwater prospects," says Arif.

By issuing 73.4 million new shares to fund the acquisition, Devon benefits in another way: "It takes away one of the concerns that people had, which is debt leverage on their balance sheet," says analyst Robert Morris of Salomon Smith Barney. Long-term debt of the combined company will fall from 61% of capitalization to a more manageable 52%. And lowering that debt load makes Devon look that much more like a bargain. The stock now trades at 4.9 times the 2003 estimates of debt-adjusted cash flow, according to Friedman Billings Ramsey's Arif, and a 2003 P/E of just ten.

If Devon is the biggest independent U.S. producer, Apache (APA, $65) might be the best run, say industry experts. And despite its own series of acquisitions, the Houston powerhouse has a balance sheet as strong as its reputation: Net debt stands at a low 31% of capitalization. Apache's appeal has only been heightened by its January deal to buy $1.3 billion in drilling assets from oil giant BP. The move is projected to bump up Apache's production volumes by about 29% this year and could boost profits by up to 40%. Buying into Apache's growth comes at a premium, though: The stock now trades near its all-time high after a recent run-up. But analysts see room for Apache to move into the low 70s. Still, the best strategy is probably to wait for a dip--say, to $55--and purchase these shares for the long term.

In XTO Energy (XTO, $25) of Fort Worth, investors get a company with a business model similar to Apache's but even more focused on the gas business. In fact, more than 80% of XTO's 2002 production came from North American natural gas, particularly its East Texas properties. The stock shot up 41% in 2002, but at its current price analysts still see plenty of potential to go higher. Morgan Stanley analyst Lloyd Byrne thinks the stock should be valued at $30 a share based solely on existing assets in East Texas. And Byrne predicts the driller will have above-average production growth of 12% a year through 2008.

A more short-term--and speculative--play is to bet on a takeover candidate as the wave of industry consolidation continues. One name being mentioned is KerrMcGee (KMG, $41). The explorer's stock has lagged behind its peers', weighed down by the company's high debt and development costs. But its reserves are nearly 20% undervalued, according to Fahnestock & Co. analyst Fadel Gheit. Shareholders could reap much of that upside in an acquisition. In the meantime there are also more concrete reasons to buy, such as the stock's 4.5% dividend yield. "I tell people, 'You know what? Take your dividend and be thankful,'" says Gheit. In such a cold market every bit of warmth helps.