It is not surprising that energy stocks have rebounded from their epidemic lows. Natural gas costs have increased gradually over the past year, although most attention has been focused on the price of gasoline. As a result, some investors are looking to purchase natural gas stocks as many prepare to turn on their furnaces for the winter.
However, the current increase in natural gas prices exceeds supply and demand. There are fears of natural gas shortages in Europe because Russia did not refill the pool during the summer. And while these geopolitical difficulties may not hurt the United States at this moment, an active hurricane season has slowed some output.
These factors make natural gas an essential "bridge fuel" for transitioning to lower-carbon alternatives. It can help bridge the gap by providing cleaner baseload electricity and offsetting the intermittent nature of wind energy and solar power.
Given the unique properties of natural gas, demand is projected to increase in the coming years. The International Energy Agency predicts that natural gas demand will climb by 31 percent by 2040, outpacing the expected 21 percent rise in oil demand. This makes it an important market for investors. This article examines how to invest in natural gas stocks in further detail.
What is Natural Gas?
The once-humid earth and its decomposing plants and animals developed numerous layers of carbon-based compounds. These would stack upon one another and combine with silt, sand, and carbon calcite to generate tremendous pressure. This pressure caused part of the organic material to convert carbon and hydrogen into natural gas. Other pockets of organic matter were transformed into coal, petroleum, and other fossil fuels.
The most abundant element in natural gas is methane. Methane is a tasteless, odorless, and colorless gas that can be burned to generate electricity. In the early 1800s, natural gas was used to light street lighting.
Today, methane gas is mainly used to produce electricity, subsequently supplied to homes, workplaces, and commercial buildings. Companies that extract, process, or distribute natural gas may offer stock ownership opportunities to investors.
An Overview of the Natural gas Market
Natural gas is a plentiful, clean, inexpensive, and adaptable fuel, yet it has significant limitations. In its gaseous state, it must flow via pipeline, and infrastructure is crucial to the natural gas business.
Midstream infrastructure, like pipelines, processing plants, and storage facilities, must be built and operated by pipeline companies to transport gas from producing basins to end markets. For international transit, natural gas must be transformed into a liquid.
Infrastructure firms are frequently the most refined natural gas stocks, and they are minor subject to the energy business's cyclical nature and price volatility. Most natural gas infrastructure companies produce constant revenue flow by collecting fees when natural gas passes through their networks, giving them a "toll booth" business model.
1. Chesapeake Energy Corporation
Let's begin with Chesapeake Energy, an LNG stock participating in hydrocarbon exploration. The company is dedicated to exploring and properly developing its vast and geographically diverse natural resource of unconventional oil and natural gas assets on U.S. territory. Chesapeake is committed to safely meeting the need for affordable, dependable, and lower-carbon energy. In the past year alone, the value of CHK stock has increased by more than double.
The business reported earlier this month that it had completed its previously announced acquisition of Chief E&D Holdings and the associated non-operated interests held by affiliates of Tug Hill Inc.
Nick Dell'Osso, president and chief executive officer of Chesapeake, stated, "The Chief transaction allows us to dedicate extra resources to our world-class Marcellus Shale position and accelerate returns to our stockholders. A larger free cash flow is expected due to these assets being integrated into our current portfolio, which will help us reduce GHG emission indicators. At the same time, we continue to deliver reliable and cheap energy beyond 2022." Is it prudent to buy in CHK stock given this information?
2. EQT Corporation
The EQT Corporation is the largest natural gas producer in the United States. The corporation focuses on extracting gas from the Appalachian Basin, which spans Pennsylvania, West Virginia, and Ohio. Early in 2022, EQT had 940,000 net acres in the Marcellus Shale core. On average, 5.5 billion cubic feet per day of natural gas equivalent were produced. EQT would be the world's twelfth-largest gas producer if it were its own country.
EQT is one of the world's least expensive natural gas producers due to its size and scale advantages. It also has the most significant credit profile among its peers, granting it access to low-cost finance and further decreasing expenses. These characteristics position EQT to generate substantial free cash flow.
The company anticipates generating a cumulative free cash flow of over $10 billion through 2026. While this assumes competitive natural gas prices at the beginning of 2022, the corporation also employs hedging strategies to mitigate the impact of volatility. Moreover, it has upside potential if prices rise.
EQT aims to spend a portion of its free cash flow on repaying debt and strengthening its financial position in the foreseeable future. It intends to repay $1.5 billion in debt as it matures through 2023. This would leave the company with abundant capital for shareholder-friendly actions such as dividends, share repurchases, and investable acquisitions. It initiated a $1 billion share repurchase program in late 2021, which it plans to exhaust by 2023. Late in 2021, the firm also reintroduced its dividend, which it hopes to grow in subsequent years.
EQT intends to continue consolidating the natural gas industry. It acquired Alta Resource Development for $2.925 billion in 2021 and Chevron's (NYSE: CVX) Appalachian Basin holdings for $735 million in 2020. The deals have increased its output, size, and free cash flow, making it the leading gas producer in the United States.
3. Occidental Petroleum Corporation
Most Occidental Petroleum Corporation's assets are located in the United States, the Middle East, and North Africa. Impressively, the business is one of the largest oil producers in the United States and a leading producer in the Permian and the offshore Gulf of Mexico.
Its midstream and marketing business ensures flow and maximizes the value of its oil and gas products. Oxy Low Carbon Ventures, a subsidiary of the corporation, is advancing cutting-edge technology and commercial solutions that contribute to the company's economic growth.
An affiliate of S.K. Trading International has agreed to sequester carbon dioxide captured via 1PointFive's planned large-scale Direct Air Capture (DAC) facility and store it in Occidental's enhanced oil recovery reservoirs in the U.S. Permian Basin for the company's first net-zero oil. This was announced on March 22, 2022. S.K. Trading could be offered the chance to acquire up to 200,000 barrels of net-zero oil annually for five years by Occidental's marketing affiliate. Buying something would be a big deal.
4. Kinder Morgan
Kinder Morgan controls the largest natural gas transmission network in the United States. This company had 71,000 miles of natural gas pipes and 700 billion cubic feet of storage capacity in early 2022. The infrastructure of Kinder Morgan connects all significant natural gas resource plays to key consumption areas. It handles around forty percent of all-natural gas consumed and exported in the United States annually.
Kinder Morgan is the largest independent carrier of refined petroleum products, independent terminal operator, and transporter of carbon dioxide. The company produces petroleum, renewable natural gas (RNG), and LNG.
The primary natural gas infrastructure business of Kinder Morgan generates relatively predictable cash flow. Ninety-four percent comes through take-or-pay contracts, other fee-based arrangements, and hedges. This enables it to create more than $4 billion in free cash flow annually.
Kinder Morgan uses its cash flow to pay a high-yielding dividend, repurchase shares, and expand its natural gas network through capital projects and acquisitions. The corporation entered 2022 with a backlog of $1.4 billion in growth projects, of which around 45 percent were natural gas-related infrastructure.
In the previous year, acquisitions have emerged as a significant growth engine. In 2021, Kinder Morgan concluded two substantial transactions. The company paid $1.22 billion for the Northeast pipeline and storage network Stagecoach Gas Services, and it also acquired RNG maker Kinetrex Energy for $310 million.
Kinetrex is the first deal completed by Kinder Morgan's energy transition ventures business segment, established in 2021. The piece seeks to find, assess, and explore commercial opportunities as the energy sector transitions to lower-carbon fuels. Because of its extensive natural gas infrastructure, Kinder Morgan is well-positioned to transport low-carbon fuels like liquefied natural gas (LNG) and hydrogen energy into the future.
5. Cheniere Energy Inc.
Cheniere Energy is among the first corporations in the United States to export liquefied natural gas. It delivers clean, secure, and economical energy to meet the rising global demand for natural gas.
Gas procurement and transportation, liquefaction, vessel chartering, and LND delivery are all capabilities of this full-service LNG provider. The Sabine Pass and Corpus Christi liquefaction complexes in the United States make up one of the world's largest liquefaction platforms. In the last year, the value of LNG has virtually doubled.
Last month, the business and EOG Resources (NYSE: EOG) revealed that they have modified their 2019 long-term Integrated Production Marketing (IPM) gas supply deal. This long-term IPM agreement will extend the period and quadruple the volume of LNG connected with the natural gas supply. The mutually advantageous long-term deal will further leverage Cheniere's infrastructure platform, capabilities, and Corpus Christi operations.
6. Shell plc
Shell is a multinational British oil and gas corporation. SHEL stock is currently on investors' radar as one of the most prominent participants in the global energy market. For size, the company operates in over 80 countries. Additionally, it sold 64,2 million tons of LNG in 2021. In addition, Shell's current market value exceeds $207 billion. Given the current state of the energy business, it is expected that significant players such as Shell will stay active on the operational front.
Shell is now collaborating with the Chinese E.V. manufacturer BYD Auto. The two entered into a strategic partnership arrangement earlier this week. They will form two joint ventures (J.V.s) in China and Europe. According to BYD, they will build a mobility service provider in Europe.
Shell will provide membership services for BYD drivers on its E.V. charging network in the region. In China, Shell will assist BYD in developing an extensive network of E.V. charging stations. It is anticipated that there will be over 10,000 terminals in Shenzhen with expansion plans.
7. Southwestern Energy (NYSE: SWN)
Southwestern Energy Co is an independent energy firm established in the United States. It is involved in the exploration, development, production, gathering, and commercialization of natural gas. The majority of the company's operations are conducted in the United States. Exploration, Production, and Marketing are the operating segments of the organization. Its Exploration and Production sector is the primary revenue generator for the corporation, generating income from the sale of natural gas and liquids. The Selling business earns income from the marketing of both companies and third-party produced natural gas and liquids volumes and through gathering fees connected with the transportation of natural gas to market.
8. Exxon Mobil (NYSE: XOM)
Exxon Mobil Corporation, doing business as ExxonMobil, is an American oil and gas company with almost 135 years of history. ExxonMobil began as a regional kerosene producer and has now expanded to encompass natural gas and oil extraction and export.
ExxonMobil is a natural gas company with the most significant market capitalization. It has the most excellent market value on our list at nearly $195 billion, and its EPS is a consistent $2.66. ExxonMobil's strong dividend yield of 7.54 percent may also attract dividend investors.
9. Antero Resources Corporation (A.R.)
Antero Resources Corporation engages in the controversial but effective fracturing of hard shale strata.
The company's core operation is hydrocarbon exploration. Nonetheless, it also produces natural gas. Fracking was a crucial topic in the most recent presidential election, and despite its harmful effects on the environment, the practice persists.
Antero identifies itself as the "largest integrated NGL and natural gas firm" in the United States. The company's reserves are virtually entirely located in the Marcellus Shale formation that spans the Appalachian Basin. According to some estimations, this location contains 84 quadrillion cubic feet of recoverable natural gas.
In 2021, A.R. stock appreciated by 246 percent. After a sharp decline in August, the stock is currently rising. However, the stock price is close to analysts' average price target, and recent analyst projections indicate a more significant upside.
10. Chevron Corporation (CVX)
Chevron stock has declined from its highs earlier this year. Investors typically view oil and gas stocks as a hedge against inflation.
If CVX stock is declining, investors may feel that inflation is as transient as the Federal Reserve claims. Chevron, one of the major natural gas companies in the United States, stands to benefit if prices rise later this year.
Notably, Chevron increased its dividend early in 2021. This is a remarkable achievement not long after a period in which many oil firms reduced or suspended dividends. This is why Chevron is a member of the elite Dividend Aristocrats club.
FAQs
What are the top natural gas stocks?
The most excellent stocks have extremely cheap manufacturing costs or constant fee-based income from long-term contracts. One of the largest and least expensive natural gas producers, EQT, is a leading natural gas stock. Similarly, the consistent cash flow created by natural gas infrastructure businesses like Chevron and Cheniere Energy distinguishes them as leading natural gas stocks.
What is liquid natural gas?
LNG, or liquefied natural gas, is the liquid form of natural gas, and it cannot be exported to worldwide markets in its natural gaseous state. Instead, specialized facilities supercool the gas to transform it into a liquid, which can subsequently be shipped to worldwide markets on gas-carrying ships.
Is natural gas a wise investment?
Natural gas investment has been complex due to oversupply and price volatility in recent years. However, demand for cleaner fuel should continue to increase in the coming years, benefiting natural gas stocks. Therefore, it may be a wise long-term investment.
Characteristics of a Reputable Natural Gas Stock
Unfortunately, not all-natural gas stocks are equally lucrative. Since natural gas stock values are intimately correlated with market natural gas prices, their weight may fluctuate rapidly in response to market conditions. As natural gas consumption decreased due to the COVID-19 epidemic, the prices of many natural gas stocks declined dramatically.
Here are some characters to look for while shopping for natural gas stocks.
Positive earnings per share value If a natural gas business's EPS is positive, it is currently profitable, even if it has substantial debt (especially if the company is relatively new). Look for natural gas stocks with a positive EPS value and verify that the company has maintained it for the past few quarters.
When searching for dividend-paying stocks, many investors look to the energy sector because most energy businesses choose to distribute dividends. A dividend is a percentage of a company's profit allocated annually, monthly, or quarterly to its shareholders. Although it may be tempting to browse for stocks based on their annual dividend payout, examine the dividend yield instead. Divide the company's yearly dividend by its current stock price to determine the dividend yield. You should seek out stocks with dividend yields below 10 percent, as this implies that the payout is sustainable and less likely to be decreased shortly.
Large market capitalization. Because natural gas prices can fluctuate daily and fall drastically when demand is low, investing in a large-cap firm with a larger market capitalization can protect your money. Consider organizations with market capitalizations exceeding $10 billion; investments in these companies are typically safer and more stable.
Conclusion
Whether you're investing in ExxonMobil or a few stocks under $10, energy investments can provide a proper passive income stream for your portfolio. However, it is essential to realize that natural gas stocks can be highly volatile investments.
If you decide to include natural gas stocks in your portfolio, ensure that they do not comprise the majority of your holdings. Use them to supplement a more extensive portfolio comprising total market index funds, S&P 500 funds, and large-cap stocks.
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