TURNING NATURAL GAS INTO A LIQUID is getting a lot of attention this week at a conference for investors in energy stocks.

"The light is turning green now for liquefied natural gas [LNG]," says John Parry, a senior equity analyst at John S. Herold, an independent energy research firm which sponsored the weeklong conference in Old Greenwich, Conn.

With U.S. demand for natural gas strong and domestic supplies dwindling, consumers must look overseas for natural gas. But in order for natural gas to make it to U.S. shores cost-effectively, it must be turned into a liquid form for easy shipping.

A number of energy companies are building facilities near natural-gas sources to liquefy gas at -260 degrees Fahrenheit, thereby compacting its volume and cutting transport costs. Then, it is shipped in special tankers to "regasification" plants, which convert the LNG back into gas.

This timing couldn't be better. Natural-gas futures hit a new all-time record at $13.45 per million British thermal units Wednesday after a report said U.S. consumers can expect higher heating bills this winter.

There are about 50 U.S. LNG projects proposed, and LNG should increase to 12% of U.S. natural-gas supply by 2010, from 7% now, says Parry.

Investors in LNG infrastructure say the timeline for getting it to U.S. shores is moving faster than expected.

Marathon Oil, the integrated exploration and refining company, said Tuesday that the race is on to get LNG to market between 2007 and 2009 when profits will be strongest. (See Weekday Trader, "Is Liquid Gas Liquid Gold?" Nov. 17, 2004.)

Marathon told conferees it is poised to start the second phase of its LNG project in Equatorial Guinea, on Africa's western coast, according to Henry Aldorf, a senior vice president at Marathon.

Natural gas is fueling acquisitions, too. Norway's Norsk Hydro this month said it would acquire Spinnaker Exploration, a Houston-based independent exploration and production company, for $2.45 billion. Parry estimates Norsk paid a nearly $1 billion premium for Spinnaker's reserves.

"Natural gas is where the real action is," says John Ryan, a longtime energy investor and an adviser to Windlass Energy Value Partners Fund, an independent Houston-based fund. "We don't have enough in the U.S. and Europe. LNG is going to be a big business."

Parry estimates roughly 15% of Marathon's earnings will come from natural gas in the coming years, making it more exposed to the upside than the biggest LNG investors -- the so-called super-major oil firms including Royal Dutch Shell, BP, Exxon Mobil and Total.

But another way to play the growth of LNG is construction, says John Olsen, who co-manages several Houston-based energy hedge funds. The veteran energy investor with Sanders Morris Harris Group, who says he has "kissed a lot of frogs and chased a lot of rabbits" in the sector, thinks the next five years will be the best of his career.

Olsen's LNG-exposed stock picks include Shaw Group and Foster Wheeler, construction and engineering companies whose energy projects include LNG-related plants. Shares in each are trading at roughly 20x forward earnings, but they deserve a premium to the broader market, he says.

"There are a huge amount of energy construction contracts to be awarded -- especially in Qatar and Saudi Arabia -- and these companies have a longstanding presence in the Persian Gulf," Olsen says.

Of course, energy stocks look rich to many investors. Marathon shares are up roughly 72% in the past year.

And the future price of natural gas is an important question mark. The higher it goes, the more foreign governments controlling reserves will push for a greater share of LNG profits. If prices are high, utilities can still switch to coal and nuclear to turn on the lights.

But expanding coal and nuclear power is problematic. And broadly, bullish investors say energy stocks still have upside because the companies budget for commodity prices at levels well below what the futures market predicts. (See Electronic Q&A, "Still Stoked About Energy," Sept. 27, 2005.)

That's why some stocks looking like the frog now, could turn into the prince.