According to a report by McKinsey published on November 5, North America’s power and natural gas markets are undergoing a significant transformation. The global trading value for these commodities has surged to nearly $33 billion in 2023, a 50% increase from the previous year. This growth is driven by several key trends that are reshaping the market landscape and creating new opportunities and challenges for both new and established players. The North American power and gas trading value pool has tripled since 2018, reaching an estimated $10 billion of EBIT in 2023, which represents approximately 30% of the global total. The report expects these value pools to continue their upward trajectory in the medium to long term, despite a potential pullback in 2024–25 due to higher gas storage levels following a milder-than-normal winter.
Read Also: 10 Oil Stocks with Biggest Upside Potential According to Analysts and 7 Best Emerging Markets Stocks To Buy Now.
Global Natural Gas Prices Surge as Cold Weather Boosts Demand
On December 3, Reuters reported that natural gas prices in Asia, Europe, and North America have surged by 30% to 50% so far in 2024, and are expected to continue climbing over the coming months. The forecast for colder weather is expected to drive higher heating demand in key consumer regions, further boosting gas prices. This trend is anticipated to keep gas market sentiment bullish until the winter season ends, with prices likely to remain high well into 2025. The rapid restocking of declining gas inventories in Europe and Asia is also expected to spur strong gas demand, even if temperatures moderate. This will ensure that gas prices have little room to decline. The high and rising gas prices are expected to increase power costs across key global markets, potentially hampering economic growth in China, Europe, and other regions, and raising concerns about inflation.
Colder-than-average temperatures are forecast for major gas-consuming areas, including China, Japan, and mainland Europe. For instance, Seoul, South Korea, is expected to see average December temperatures of around -2.17°C, compared to a long-term average of -0.7°C. Similar below-normal temperatures are predicted for Shanghai, Tokyo, and Hong Kong, which will increase the demand for heating and accelerate the consumption of natural gas and coal. In Europe, gas inventories have already seen a significant decline. Between October 1 and the end of November, cumulative gas inventories in Germany, the Netherlands, Belgium, and France fell by 11%, compared to relatively flat inventories in 2023 and a 3.5% increase in 2022. This rapid drawdown, coupled with the need to rebuild stocks, will put additional pressure on gas prices. In the United States, while natural gas inventories are currently the highest in over five years, they are on the brink of the traditional draw-down period, which typically sees a 9% reduction in stockpiles over the final five weeks of the year. This will further tighten gas supplies and support market sentiment.
The confluence of regulatory changes, market dynamics, and weather conditions is reshaping the global natural gas and power markets, presenting both risks and opportunities for investors and industry players. With that in context, let’s take a look at the 8 most undervalued natural gas stocks to buy according to analysts.
A large natural gas pipeline snaking through a rural landscape.
Our Methodology
To compile our list of the 8 most undervalued natural gas stocks to buy according to analysts, we used Finviz and Yahoo stock screeners to find the 25 largest gas companies trading below the forward P/E ratio of 15 as of December 9. We then sourced the analysts’ average price targets and picked the 8 stocks that had the highest upside potential, as of the same date. The list is sorted in ascending order of analysts’ average upside potential.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Most Undervalued Natural Gas Stocks To Buy According To Analysts
8. ConocoPhillips (NYSE:COP)
Upside Potential: 29.54%
Forward P/E Ratio as of December 9: 11.24
Number of Hedge Fund Investors: 66
Stock Price as of December 9: $103.22
ConocoPhillips (NYSE:COP) is an independent global exploration and production company based in Houston, Texas. The company is involved in the exploration, production, transportation, and marketing of crude oil, bitumen, natural gas, natural gas liquids, and liquefied natural gas. As of December 31, 2023, the company’s operations and activities spanned 13 countries worldwide.
ConocoPhillips (NYSE:COP) is taking several strategic steps to grow its gas business, both domestically and internationally. The company is leveraging the Matterhorn pipeline in the Permian Basin to transport gas to the Katy area near Houston, Texas, where the company aims to achieve higher gas prices. This pipeline is expected to increase capacity to 2.5 Bcf with the addition of compression in 2025. Internationally, ConocoPhillips (NYSE:COP) is expanding its presence in the LNG market to capitalize on growing global demand. The company has executed three agreements during Q3, representing about 1.8 MTPA of capacity, which aims to support the expected increase in gas supply to Europe. These agreements will allow ConocoPhillips (NYSE:COP) to place volumes more efficiently into multiple European markets and enhance its ability to capture premium prices.
Additionally, ConocoPhillips (NYSE:COP) is focused on being a full value chain player in the LNG market, investing in liquefaction, shipping, and regasification capabilities. This comprehensive approach is designed to ensure long-term access to premium gas markets in Europe and Asia, aligning with the company’s bullish outlook on LNG demand growth over the next decade and beyond. Furthermore, ConocoPhillips (NYSE:COP) is actively optimizing its portfolio to enhance the overall competitiveness of its gas assets.
7. Diamondback Energy, Inc. (NASDAQ:FANG)
Upside Potential: 29.97%
Forward P/E Ratio as of December 9: 11.56
Number of Hedge Fund Investors: 49
Stock Price as of December 9: $166.83
Diamondback Energy, Inc. (NASDAQ:FANG) is an independent oil and natural gas company in Midland, Texas that focuses on unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas. The company employs advanced technologies and efficient drilling practices to enhance natural gas recovery while maintaining a low-cost structure.
Diamondback Energy, Inc. (NASDAQ:FANG) is focusing on infrastructure and transportation solutions to get its gas to higher-value markets. The company has secured significant capacity on key pipelines, such as Whistler and Matterhorn, with about 250 million cubic feet of gas per day of space. This ensures that a substantial portion of its gas production can be transported to markets where it can fetch better prices. Additionally, Diamondback Energy, Inc. (NASDAQ:FANG) has a 10% stake in the upcoming Blackcomb pipeline, which will transport gas from the Permian Basin to South Texas and is expected to come online in a few years.
Diamondback Energy, Inc. (NASDAQ:FANG) is also exploring innovative ways to add value to its gas stream. One such initiative is the development of power generation facilities using its natural gas resources. By converting natural gas into electricity, Diamondback Energy, Inc. (NASDAQ:FANG) aims to capture higher margins and insulate its business from the volatility of gas prices. The company is in discussions with data center operators and other potential partners to develop power solutions that can benefit from the low-cost gas in the Permian Basin.
Diamondback Energy, Inc. (NASDAQ:FANG) is also investing in Verde Clean Fuels, which focuses on converting natural gas into low-carbon fuels. This investment aligns with the growing trend towards sustainable and cleaner energy solutions and provides Diamondback Energy, Inc. (NASDAQ:FANG) with another avenue to monetize its gas resources.
6. Coterra Energy Inc. (NYSE:CTRA)
Upside Potential: 32.29%
Forward P/E Ratio as of December 9: 9.03
Number of Hedge Fund Investors: 39
Stock Price as of December 9: $24.93
Coterra Energy Inc. (NYSE:CTRA) was formed in late 2021 as a result of a merger between Cimarex Energy Co. with Cabot Oil & Gas. Coterra Energy Inc. (NYSE:CTRA) operates a diverse portfolio of oil and natural gas assets, with significant natural gas production in the Marcellus Shale.
Coterra Energy Inc. (NYSE:CTRA) is actively positioning itself for significant growth in the natural gas sector by leveraging its robust asset portfolio and strategic initiatives to capitalize on future market opportunities. One of the key strategies is the company’s focus on enhancing capital efficiency and operational excellence. Moreover, Coterra Energy Inc. (NYSE:CTRA) is entering into long-term LNG sales agreements. The company has recently executed 200,000 MMBtu per day of LNG sales commitments, split evenly between European and Asian markets, with the first sales scheduled for 2027 and 2028. These agreements are net-back sales deals directly linked to international gas price indexes and provide exposure to premium pricing.
Additionally, Coterra Energy Inc. (NYSE:CTRA) is continuously exploring new opportunities to enhance its gas portfolio. The company is open to strategic bolt-on acquisitions that can add to its existing inventory and provide a deeper, more diversified asset base.
5. TotalEnergies SE (NYSE:TTE)
Upside Potential: 33.12%
Forward P/E Ratio as of December 9: 6.90
Number of Hedge Fund Investors: 17
Stock Price as of December 9: $56.91
TotalEnergies SE (NYSE:TTE) is a French multinational integrated energy company that serves a wide range of clients, including governments, industries, and individuals, through its integrated energy business spanning crude oil production, natural gas, petrochemicals, and renewables.
TotalEnergies SE (NYSE:TTE) is heavily investing in renewable energy and expanding its natural gas operations to meet rising global demand. The company is enhancing its integrated LNG portfolio by securing long-term sales contracts and acquiring low-cost upstream gas supplies. The company signed several medium-term LNG sales contracts in Asia, totaling 4 million tons, and has signed an agreement with Lewis Energy Group to acquire a 45% interest in dry gas-producing assets in the Eagle Ford in Texas. Furthermore, TotalEnergies SE (NYSE:TTE) is working to improve the financial viability of its gas operations by focusing on negotiating better terms for gas transfer prices. The company is ensuring that its upstream projects are economically viable and contributing to the overall profitability of the company.
TotalEnergies SE (NYSE:TTE) is also divesting non-core assets to streamline its portfolio and improve its financial position. The company is currently in the process of selling onshore assets in Nigeria and other regions where it sees limited long-term potential. By focusing on core business areas and optimizing its asset base, TotalEnergies SE (NYSE:TTE) aims to enhance its operational efficiency and financial resilience.
4. BP p.l.c. (NYSE:BP)
Upside Potential: 34.15%
Forward P/E Ratio as of December 9: 7.03
Number of Hedge Fund Investors: 36
Stock Price as of December 9: $28.70
BP p.l.c. (NYSE:BP) is a vertically integrated multinational oil and gas company headquartered in London. The company operates in almost all aspects of the oil and gas industry and operates in over 80 countries worldwide. In late 2022, BP p.l.c. (NYSE:BP) acquired Archaea Energy for $4.1 billion. Archaea Energy is now one of the largest renewable natural gas (RNG) producers in the United States.
Archaea is making significant strides in the RNG sector. The company plans to bring in a total of 15 plants online this year, with seven of them fully operational and another eight in the process of integrating into the midstream pipeline network. These eight plants are currently flowing natural gas and working through the necessary adjustments to ensure the effective separation of molecules, which is crucial for the smooth operation and efficiency of the gas flow.
BP p.l.c. (NYSE:BP) is also focusing on reducing its debt to strengthen its financial position and improve overall stability. On December 6, Reuters reported that BP p.l.c. (NYSE:BP) is finding buyers for a stake of up to 49% in its U.S. natural gas pipeline network. With the potential sale, the company aims to raise as much as $3 billion. This move is part of CEO Murray Auchincloss’ strategy to reduce BP p.l.c.’s (NYSE:BP) debt, which has to $24.3 billion at the end of September, up from $22.3 billion a year earlier, due to lower-than-expected asset disposals. BP p.l.c. (NYSE:BP) also plans to divest stakes in its Lightsource BP solar business and its U.S. onshore wind division.
3. Schlumberger Limited (NYSE:SLB)
Upside Potential: 40.06%
Forward P/E Ratio as of December 9: 11.43
Number of Hedge Fund Investors: 65
Stock Price as of December 9: $40.96
Schlumberger Limited (NYSE:SLB) is a global leader in providing cutting-edge technology and services for the energy sector. The company focuses on natural gas exploration, production, and management. Schlumberger Limited (NYSE:SLB) also provides advanced solutions for pressure and flow-rate measurement, artificial lift production equipment, and intelligent well-completion solutions.
Schlumberger Limited’s (NYSE:SLB) OneSubsea segment, which delivers integrated subsea systems, including wellheads, manifolds, and control systems play a critical role in natural gas development. The company has developed advanced subsea compression systems that are critical for maintaining and optimizing the production of natural gas in deepwater environments. These systems help extend the life of mature fields and improve the recovery rates of new discoveries. Schlumberger Limited (NYSE:SLB) has been focusing on its subsea compression solutions, such as the Subsea Gas Compressor (SGC), which is designed to handle the harsh conditions of deepwater environments, ensuring reliable and efficient gas production.
In the international gas market, Schlumberger Limited (NYSE:SLB) is focusing on expanding its presence in regions with strong gas investment, such as Asia, the Middle East, and the North Sea. The company plans to continue investing in digital products and services that enhance efficiency and productivity, which are particularly valuable in long-cycle gas and deepwater projects. By doing so, Schlumberger Limited (NYSE:SLB) aims to support the growing demand for natural gas, which is expected to play a significant role in the global energy transition due to its lower carbon footprint compared to other fossil fuels.
2. Ovintiv Inc. (NYSE:OVV)
Upside Potential: 42.23%
Forward P/E Ratio as of December 9: 9.75
Number of Hedge Fund Investors: 44
Stock Price as of December 9: $41.20
Ovintiv Inc. (NYSE:OVV) is a Denver-based energy company specializing in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids across the United States and Canada. The company’s key gas-focused assets include the Montney Formation in northeast British Columbia and northwest Alberta. The company also operates in the Horn River area in British Columbia and the Permian Basin in the United States, which are also known for their rich natural gas reserves.
Due to the low gas prices in the Waha hub near the Permian Basin, Ovintiv Inc. (NYSE:OVV) has been focusing on transporting additional gas out of the Permian to reduce exposure to local price volatility. In the Montney Basin, Ovintiv Inc. (NYSE:OVV) has been a pioneer in developing one of the most extensive and cost-efficient natural gas exploration in North America. In Q3, the company’s natural gas production exceeded the high end of its guidance, averaging 1,725 cubic feet per day. The company also increased its full-year natural gas production forecast to between 1,700 and 1,715 million cubic feet per day.
Ovintiv Inc. (NYSE:OVV) plans to continue diversifying its natural gas production across different basins. According to management, this approach is crucial because regions such as Western Canada and the Permian Basin have experienced significant drops in gas prices during the summer months. By spreading production across various regions, the company aims to mitigate the risk of low gas prices in specific markets.
1. Devon Energy Corporation (NYSE:DVN)
Upside Potential: 45.87%
Forward P/E Ratio as of December 9: 6.86
Number of Hedge Fund Investors: 41
Stock Price as of December 9: $34.99
Devon Energy Corporation (NYSE:DVN) is a leading independent oil and gas exploration and production company based in the United States. The company has a strong presence in key US basins, including the Delaware Basin, Williston Basin, and Powder River Basin.
Devon Energy Corporation (NYSE:DVN) is actively focusing on maximizing its natural gas realizations, particularly in the Permian Basin. The company has made significant investments in infrastructure to transport gas from the Waha hub to the Gulf Coast. The recent completion of the Matterhorn Express Pipeline, which is a 580-mile natural gas pipeline that transports gas from the Permian Basin to Katy, Texas with a capacity of 2 billion cubic feet per day, is a prime example of this strategy. By moving gas to the Gulf Coast, Devon Energy Corporation (NYSE:DVN) aims to reduce exposure to regional price fluctuations.
To drive further growth in production and efficiency, Devon Energy Corporation (NYSE:DVN) is also exploring and implementing advanced technologies. One key area of focus is the deployment of e-frac (electric fracturing) and simul-frac (simultaneous fracturing) techniques. The company is also investing in data analytics and machine learning to optimize well placement and completion designs, ensuring that each well is maximized for production.
While we acknowledge the potential of Devon Energy Corporation (NYSE:DVN) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DVN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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