Tankers bringing liquefied natural gas, or LNG, to the port of Rotterdam in the Netherlands. Exports of U.S. LNG to Europe and elsewhere are expected to ramp later in the decade.
The invasion of Ukraine—and Europe’s reliance on Russian energy—spotlights the strategic importance of American natural gas.It also opens up another opportunity for U.S. producers, whose stock prices do not adequately reflect the growing global demand for gas.
Even after doubling in price over the past year, natural gas remains cheap in the U.S. compared with the rest of the world—roughly a 10th of what Europe pays. Arun Jayaram, a J.P. Morgan analyst, expects U.S. prices to close part of the gap.
“The U.S. was structurally oversupplied for gas for most of the past eight to nine years,” he says. “With capital discipline and growing export demand, that is changing.”
The U.S. is exporting about 10% of its daily output as liquefied natural gas. More of that LNG is likely to go to Europe as customers there shun Russian gas. In January, U.S. exports of LNG to Europe topped Russian pipeline volumes there for the first time. As new facilities are built, LNG exports from the U.S. are projected to rise by as much as 50% by 2027.
In the U.S., meanwhile, overall gas demand is expected to rise 10% by 2025. according to the U.S. Energy Information Administration. Producers like
(CTRA) stand to benefit. While their stocks have risen lately, their ample free cash flow, strong or rapidly improving balance sheets, and higher capital returns to shareholders make them still look attractive.
“As more investors have entered the energy sector, they’ve gone to the biggest, liquid stocks like Exxon Mobil and Chevron. But as they start to look more deeply into the sector, the gas producers may stand out,” says Josh Silverstein, energy analyst at Wolfe Research.
Here are seven natural-gas producers to consider.
*Base plus variable dividend; **Projected in 2022; E=estimate ***Includes a special dividend
Sources: Bloomberg; company reports
EQT shares have underperformed because the company hedged the bulk of its 2021 output and 65% of its 2022 output at well below current prices. The good news is that it is just 40% hedged for 2023. The shares at about $25 have a projected free-cash-flow yield of nearly 20% this year and over 25% in 2023. It recently began a 50-cent annual dividend for a 2% yield.
“This shouldn’t trade [at $25] with a 25% free-cash-flow yield,” with an improving balance sheet and bad hedges rolling off in 2023, says Silverstein, who thinks the stock could trade at $35.
Coterra, formed from the merger last year of Cabot Oil and Gas and Cimarex Energy, is largely free of hedges this year. And it has one of the better balance sheets in the industry.
Like a growing number of energy peers, Coterra is paying both a base dividend and a variable dividend that shifts with earnings. The shares at about $26 yield about 8.7% between the base and variable dividend. The base dividend is 60 cents a share annually.
Chesapeake, which exited bankruptcy last year with a clean balance sheet, has what it calls a “best in class dividend program” of a base and variable payout that now results in a 9% yield at the recent stock price of $79. Silverstein has an Outperform rating and a $96 price target.
(AR) benefits from its position as the country’s second-largest producer of natural-gas liquids like propane and butane, whose prices have risen sharply in the past year.
““In addition to its leverage to U.S. gas-price strength, the NGLs are a unique earnings driver for Antero,” says J.P. Morgan’s Jayaram, who also points to a 25% projected free-cash-flow yield this year, one of the highest in the sector. The company is 50% hedged on its gas for this year and a little for 2023. He has an Overweight rating and a $28 price target on Antero, whose shares trade around $24.
(SWN), whose shares trade around $5, has been the worst performer in the group in the past year. This reflects acquisitions and a relatively high debt load. It’s also about 75% hedged on its gas output for 2022. Yet it trades cheaply with a projected 25% free-cash-flow yield this year.
(RRC) benefits from significant NGL production, which accounts for about 25% of its output. The company has announced a $500 million repurchase program for 2022 and plans to pay a 32-cent annual dividend starting later this year. That should result in a 1.3% yield at the recent stock price of $25.
Despite its name,
(TRMLF) is the largest natural-gas producer in Canada. The U.S.-listed shares trade around $40 and carry a yield of 4% between the base and special dividend. The company has low debt and expects over $2 billion of free cash flow this year. It is a top pick of Peters & Co. analyst Tyler Reardon, who has a price target that equates to about $60 on the U.S. shares.
Even with the recent rally, U.S. gas is just a quarter of the cost of oil on an energy-equivalent basis. With global demand poised to grow, investors should tap into the sector.
Write to Andrew Bary at firstname.lastname@example.org