There is still a lot of room for natural gas prices to rise, and some natural gas producers will greatly benefit.
The Russian-Ukrainian conflict and Europe's dependence on Russian energy underscore the strategic importance of U.S. natural gas, opening another door of opportunity for U.S. gas producers whose stock prices do not yet fully reflect the growing global demand for natural gas.
Although U.S. natural gas prices have doubled over the past year, they are still cheap compared to the rest of the world, at only about one-tenth of the price of natural gas in Europe. J.P. Morgan analyst Arun Jayaram expects rising U.S. natural gas prices to close that gap.
"For most of the past eight or nine years, there has been a structural oversupply of natural gas in the United States, which is changing as producers reduce capital spending and demand for exports grows," Jayalam said. ”
U.S. exports of liquefied natural gas (LNG) account for about 10 percent of its daily production, and U.S. exports of LNG to Europe will increase as Europe reduces purchases of Russian gas. In January, the United States surpassed Russia in LNG exports to Europe for the first time. With the completion of new facilities, U.S. LNG exports are expected to grow by 50 percent by 2027.
At the same time, total U.S. demand for natural gas is expected to grow by 10 percent by 2025. Data from the U.S. Energy Information Administration. Producers such as EQT (EQT), Chesapeake Energy (CHK) and Coaterra Energy (CTRA) will benefit. While markup companies' share prices have risen recently, their stocks still look attractive with abundant free cash flow, strong or rapidly improving balance sheets, and higher returns on shareholder capital.
Josh Silverstein, an energy analyst at Wolfe Research, said: "Before there were more and more investors buying energy stocks, they mainly chose the most liquid stocks such as ExxonMobil and Chevron, but as investors begin to look at other areas of energy, natural gas producers are expected to stand out." ”
Here are 7 natural gas producers worth considering for investors.
EQT's share price has underperformed recently as the company hedged most of its 2021 production and 65% of its 2022 production at prices well below current prices. The good news is that the hedging rate in 2023 is only 40%. EQT recently traded around $25 and expects free cash flow yields to approach 20 percent this year and more than 25 percent by 2023. The company recently began paying an annual dividend of 50 cents, with a dividend yield of 2 percent.
Silverstein noted that EQT's balance sheet is improving and free cash flow yields are rising, and he believes EQT's stock price can rise to $35.
Coterra, formed by the merger of Carbon Oil and Gas and Cimarex Energy last year, has largely not hedged production this year. The company's balance sheet is among the best in the industry.
Like a growing number of companies in the energy sector, Coterra pays both a basic dividend and a variable dividend that varies with profits. The company's stock price recently went around $26 with a dividend yield of about 8.7%. The base dividend is 60 cents per share per year.
Chesapeake emerged from bankruptcy protection last year and recently had a share price of $79, with a dividend yield of about 9 percent on the combined base and variable dividends. Silverstein rated the stock as "outperforming" with a price target of $96.
Antero Resources (AR), the second-largest producer of natural gas condensate (NGL) such as propane and butane in the U.S., has seen its share price rise sharply over the past year.
JPMorgan Chase & Co.'s Jayalam said: "In addition to benefiting from rising U.S. natural gas prices, NGL is also a unique profit driver for Antero. He also noted that Antero's free cash flow yield this year is expected to reach 25 percent, one of the highest levels in the industry. The company hedged 50 percent of its natural gas production this year and less in 2023. Jayalam's rating on Antero is "overweight" with a target share price of $28, with the company recently trading around $24.
Southwestern Energy (SWN), which recently traded around $5, was the worst-performing gas company last year, largely dragged down by acquisitions and a relatively heavier debt burden. The company also hedged about 75 percent of its natural gas production in 2022. However, the free cash flow yield is expected to reach 25% this year, and the stock price has room to rise.
Like Antero, Range Resources (RRC) benefits from a large amount of NGL production, which accounts for around 25% of its production. The company announced a $500 million buyback program for 2022 and plans to pay an annual dividend of 32 cents starting later this year. Based on the recent $25 share price, the dividend yield is 1.3%.
Tourmaline Oil (TRMLF) is Canada's largest producer of natural gas. The company's U.S.-listed stock recently priced around $40, and the company also pays out base dividends and special dividends with a dividend yield of 4%. Tourmaline has less debt and expects free cash flow to exceed $2 billion this year. Tourmaline, the stock of choice for Peters & Co. analyst Tyler Reardon, gave a price target of $60.
Even taking into account the recent gains, U.S. natural gas prices are still only a quarter of oil prices. At a time when global demand for natural gas is growing, investors can consider entering this space.
Wen | Barron's writer Andrew Bary
Edit | Guo Liqun
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Original barronschina articles, not reproduced without permission. For the English version, see "Here Are 7 Stocks to Play the Rally in Natural Gas" on March 4, 2022.
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