In this article, we will discuss the 10 best natural gas stocks to buy now. If you want to skip our analysis of the gas market, go directly to the 5 Best Natural Gas Stocks to Buy Now.
Natural gas prices have risen by 700% in Europe since the start of 2021. This has taken the continent within touching distance of a recession as the increase in the price of natural gas has boosted the prices of everyday products and taken inflation to a multi-decade high. To combat this inflation, central banks are raising benchmark interest rates, which is further dampening demand. The economic conditions have made natural gas one of the most important commodities and given it the same importance as crude oil in influencing the global geopolitical scenario. The start of the conflict between Russia and Ukraine in late February this year has significantly impacted prices as Russia is cutting back supplies to European countries favoring Ukraine. On the other hand, Europe wants to lower its reliance on Russian gas and become energy independent from Russia in the long run.
Crisis in Europe
Countries are looking to secure liquefied natural gas (LNG) cargoes before the start of winter in the northern hemisphere to make up for the gap between supply and demand. The largest economic member of the European Union, Germany, has highlighted the possibility of a crisis similar to the collapse of Lehman Brothers in 2008 due to the shortage of natural gas. The main pipeline providing natural gas from Russia to Germany is expected to close down for 10-day maintenance. However, there is a widespread belief that Russia may not reopen the supply of natural gas after maintenance.
The G7 countries are continuously looking for ways to adversely impact Russia’s earnings from natural gas as the earnings are diverted towards funding the conflict with Ukraine. The countries are proposing new LNG investments and other alternatives. Some developing countries that had built their energy infrastructure around natural gas because it was an economical and environment-friendly alternative are now facing challenges in affording natural gas as a raw material due to its higher cost.
During all this uncertainty, the US has emerged as a prominent LNG exporter and is within touching distance of Qatar, which is the biggest LNG exporter in the world currently. In 2021, 44 countries imported LNG, and the quantity imported was double that 10 years ago.
In such socio-economic conditions, the explosion in the Freeport LNG facility in early June had a major impact globally. The terminal is one of the biggest LNG exporting plants in the US. Initially, the plant was expected to be back online in three weeks, but the US Pipeline and Hazardous Materials Safety Administration (PHMSA) has barred it from restarting its operations until the operator of the facility addresses issues related to health and public safety. Since the incident, natural gas prices have risen by 60% across Asia and Europe. Natural gas stocks such as Enbridge Inc. (NYSE:ENB), Chesapeake Energy Corporation (NASDAQ:CHK), and Antero Resources Corporation (NYSE:AR) are amongst the companies benefitting from the gains.
The increase in the demand for LNG is resulting in the development of numerous projects across North America and the Middle East. In April 2022, Indonesian billionaire and business tycoon Sukanto Tanoto backed an LNG project in Canada. In June, Cheniere Energy, Inc. (NYSE:LNG) approved the expansion of its LNG terminal in Texas. Meanwhile, ExxonMobil Corporation (NYSE:XOM), TotalEnergies SE (NYSE:TTE), ConocoPhillips (NYSE:COP), Eni S.p.A (NYSE:E) and Shell plc (NYSE:SHEL) have all taken a stake in the $29 billion LNG project in Qatar.
Photo by Max Bender on Unsplash
Our Methodology
Let’s begin our list of the 10 best natural gas stocks to buy now. We will look at the possible growth drivers for these companies along with the number of hedge funds that have a stake in these companies. The hedge fund sentiment has been determined using Insider Monkey’s database of over 900 elite hedge funds.
10 Best Natural Gas Stocks to Buy Now
10. Cheniere Energy, Inc. (NYSE:LNG)
Number of Hedge Fund Holders: 62
Stock Price as of July 7: $124.42
Cheniere Energy, Inc. (NYSE:LNG) is a Houston, Texas-based producer of LNG. The company is the biggest producer of LNG in the US and the second biggest globally.
On June 22, Cheniere Energy, Inc. (NYSE:LNG) reached an agreement with Chevron Corporation (NYSE:CVX) to supply two million tonnes of LNG annually. Under the terms of the agreement, the initial deliveries will be made in 2026 and continue till 2042. According to Shell plc (NYSE:SHEL), demand for LNG is expected to nearly double to 700 million tonnes by 2040.
On May 23, Elvira Scotto at RBC Capital increased the target price on Cheniere Energy, Inc. (NYSE:LNG) from $151 to $178. The analyst maintained an Outperform rating on Cheniere Energy, Inc. (NYSE:LNG) stock as she expects the company to become a beneficiary of the LNG boom globally.
Cheniere Energy, Inc. (NYSE:LNG) was discussed in the Q3 2021 investor letter of ClearBridge Investments. Here’s what the firm said:
“Cheniere Energy is an energy infrastructure company that owns and operates U.S. liquefied natural gas (LNG) export facilities. Strong quarterly results and the disclosure of capital allocation policies were positively received by the markets. In addition, continued supply and demand tightness in the LNG market created a favorable commodity price environment.”
Cheniere Energy, Inc. (NYSE:LNG) was held by 62 hedge funds at the end of Q1 2022.
9. EQT Corporation (NYSE:EQT)
Number of Hedge Fund Holders: 52
Stock Price as of July 7: $31.65
EQT Corporation (NYSE:EQT) is a Pittsburgh, Pennsylvania-based natural gas producer. It is the biggest natural gas company in the US, with an asset base in the Appalachian Basin spread across Ohio, Pennsylvania, and West Virginia.
In a note issued to investors on June 13, William Janela at Credit Suisse increased the target price on EQT Corporation (NYSE:EQT) from $41 to $50. The revised target provides a potential upside of nearly 58% from the last closing price as of July 6. The analyst raised the company’s cash flow per share estimate from $1.69 to $2.36 on the back of better-than-expected natural gas prices during Q2 2022. Natural gas prices in the US averaged $7.17/MMBtu during the quarter. The improvement in cash flow generation ability will also enhance EQT Corporation’s (NYSE:EQT) ability to give back healthy returns to investors.
Here’s what ClearBridge Investments said about EQT Corporation (NYSE:EQT) in its Q1 2022 investor letter:
“In the early days of the invasion, we made two measured changes to the portfolio based on longer-term fallout we anticipate from Russia’s invasion of Ukraine. First, we initiated small positions in U.S. natural gas producer EQT (NYSE:EQT).
Given its superior environmental profile compared to other fossil fuels, we have long favored natural gas in our energy holdings. Combustion of natural gas releases 50% less CO2 than coal, 25% less CO2 than gasoline and dramatically less particulate and pollution, per the U.S. Energy Information Administration. With the advances in shale production this century, the U.S. has become a natural gas powerhouse with some of the lowest-cost and largest reserves in the world. But because natural gas is difficult to ship across the ocean (it must be liquefied, which requires expensive infrastructure on both ends of the voyage), America’s gas bounty has ironically proved a burden for U.S. producers.
The surplus of natural gas in North America has resulted in low prices and weak earnings for gas-focused producers. Exports, while growing, are restrained by the high cost of building export infrastructure. Europe, in a Faustian bargain, has relied on abundant, inexpensive Russian gas transported by pipeline.
Despite the abundance of low-cost resources and a superior environmental profile, the investment case for U.S. natural gas producers was previously unfavorable due to oversupply in the domestic market. In the days preceding the invasion, we were quick to realize the war would change global energy flows. Europe is shifting away from Russia and toward new sources of imported liquified natural gas. We purchased our stakes in EQT to capitalize on these trends. The recently announced energy pact between the U.S. and Europe represents an early positive datapoint in support of this investment thesis. We funded these purchases, in part, with a trim of Pioneer. While we continue to like Pioneer, the risk/reward outlook for the stock is more balanced following recent gains in the shares.”
As of Q1 2022, EQT Corporation (NYSE:EQT) was held by 52 hedge funds.
8. Kinder Morgan, Inc. (NYSE:KMI)
Number of Hedge Fund Holders: 40
Stock Price as of July 7: $16.36
Kinder Morgan, Inc. (NYSE:KMI) is a Houston, Texas-based energy infrastructure company that has 83,000 miles of pipelines and 141 terminals under its ownership and operations. These pipelines transport crude oil, natural gas, and other types of renewable and conventional fuel sources.
Michael Blum at Wells Fargo upgraded Kinder Morgan, Inc. (NYSE:KMI) stock from an Underweight to an Equal Weight rating on April 28. The analyst also brought into use the sum-of-the-parts valuation technique to arrive at the target price of $21, increasing it from $19 previously. The analyst sees Kinder Morgan, Inc. (NYSE:KMI) as a defensive midstream company. With the anticipated increase in the demand for LNG along with above $100 per barrel price for crude oil, Kinder Morgan, Inc. (NYSE:KMI) can be expected to become a beneficiary of all these developments.
Kinder Morgan, Inc. (NYSE:KMI) was held by 40 hedge funds as of Q1 2022.
7. Southwestern Energy Company (NYSE:SWN)
Number of Hedge Fund Holders: 35
Stock Price as of July 7: $5.86
Southwestern Energy Company (NYSE:SWN) is a Houston, Texas-based natural gas exploration and production (E&P) company.
On June 21, Southwestern Energy Company (NYSE:SWN) approved a share buyback plan of $1 billion. The program is expected to start immediately and will be completed by December 2023. Furthermore, Southwestern Energy Company (NYSE:SWN) is also looking to achieve a target leverage ratio of 1x to 1.5x by the end of this year and lower its debt to $3 billion to $3.5 billion by the end of next year. On the successful outcome of Haynesville’s execution, Subash Chandra at Benchmark upgraded Southwestern Energy Company (NYSE:SWN) stock from a Hold to a Buy rating with a target price of $14 on June 15. The analyst highlighted that two transformational acquisitions in 2021 have aided Southwestern Energy Company (NYSE:SWN) in delivering solid YTD results. The analyst anticipates the results to improve further and bring the company to a position to return capital by mid-2023.
Greenlight Capital shared its outlook on Southwestern Energy Company (NYSE:SWN) in its Q1 2022 investor letter. Here’s what the firm said:
“SWN is the second largest producer of natural gas in the U.S. The company is well-situated to satisfy growing domestic and export demand. Over the short, medium and long term, Europe now intends to reduce its reliance on Russian energy and increase its use of U.S. LNG. Based on its 2021 year-end reserves – which assumed a $3.60/MMBtu long-term natural gas price – SWN has a PV-104 value of $13.83 per share. By the end of the first quarter, the U.S. natural gas 5-year forward curve averaged $4.28/MMBtu, while international seaborne LNG was close to $20/MMBtu. Over the intermediate term, with the benefit of substantial global investment in infrastructure, we expect prices for U.S. and international natural gas to converge. We acquired our shares at an average price of $6.58. SWN shares ended the quarter at $7.17.”
Southwestern Energy Company (NYSE:SWN) was held by 35 hedge funds as of Q1 2022.
6. Ovintiv Inc. (NYSE:OVV)
Number of Hedge Fund Holders: 44
Stock Price as of July 7: $39.14
Ovintiv Inc. (NYSE:OVV) is a Denver, Colorado-based E&P company that is focused on developing its multi-basin presence across North America.
In a note issued on June 28, Arun Jayaram at JPMorgan upgraded Ovintiv Inc. (NYSE:OVV) stock from a Neutral to an Overweight rating and increased the target price from $56 to $64. Following the recent slump in stock price, Ovintiv Inc. (NYSE:OVV) stock is exchanging hands at a free cash flow yield of 33% on 2023 estimates. This is the fourth highest yield in the E&P industry. The analyst thinks that some of the challenges that the company faced during the first half of 2022 should be “in the rearview mirror near term.”
Miller Value Partners discussed its stance on Ovintiv Inc. (NYSE:OVV) in its Q4 2021 investor letter. Here’s what the firm said:
“The outlook for high multiple favorites depends to a great degree on interest rates. Warren Buffett likened interest rates to the force of gravity for asset prices. At current low levels, high valuations on long-duration assets can be justified. If interest rates move up, the adjustment will be painful. Market action early in the new year, with the swift moves up in interest rates and down in the Nasdaq, offers a taste of the medicine.
We underwrite all our names to have sufficient upside even if risk-free rates move up to 3% (a scenario, not a forecast!). As we evaluate the opportunity set, we find more attractive prospects in the classic value names. We often hear that people think value investing is dead, which only strengthens our conviction. Our gross exposure to classic value has risen from 44% a year ago to 62% currently.
One new name that illustrates the potential we see is Ovintiv (OVV), an oil and gas producer. We’ve seen a huge shift in the industry away from growth towards returns on capital, cash generation, and capacity discipline. OVV exemplifies the change.
OVV’s new CEO Brendan McCracken says: “We are at the forefront of driving innovation to produce oil and gas from shale both profitably and sustainably. We will generate superior returns and free cash flow by continuously improving capital efficiency and expanding margins while driving down emissions. We will deliver that value to our shareholders through disciplined capital allocation.”
Based on crude at $65 (well below the current $83.82 as of 1/14/22), the company guides to free cash flow generation of $11B over the next 5 years and $21B in the next 10 years. The company’s market cap is currently $10B and its enterprise value is $16B. It’s returning a significant portion of the capital to shareholders. If crude averages $70 in 2022, the company will return $700M to shareholders (in addition to paying down a significant amount of debt), which implies a yield of 7% at the current $39.53 price. In other words, there’s a good shot the company will return nearly its entire market cap to shareholders over the next 5 years.”
Ovintiv Inc. (NYSE:OVV) was held by 44 hedge funds at the end of the first quarter of 2022.
In addition to Ovintiv Inc. (NYSE:OVV), stocks such as Enbridge Inc. (NYSE:ENB), Chesapeake Energy Corporation (NASDAQ:CHK), and Antero Resources Corporation (NYSE:AR) are also gaining popularity among investors.
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Disclose. None. 10 Best Natural Gas Stocks to Buy Now is originally published on Insider Monkey.
