Natural gas is an essential fuel. We use it to generate electricity, heat our houses, and for various other domestic, commercial, and industrial purposes. It is the most abundant and cheapest fossil fuel that burns cleanly.
Natural gas can help bridge the gap by providing cleaner baseload electricity and offsetting the intermittent nature of wind and solar energy.
Given the unique qualities of natural gas, it is anticipated that demand will increase in the coming years. The International Energy Agency anticipates a 31% growth in natural gas demand by 2040, outpacing the anticipated 21% increase in oil demand. And natural gas prices skyrocketed following the Russian invasion of Ukraine, as Russia is a major gas producer and has been subjected to significant sanctions. This makes the market significant for investors.
Considerations for a natural gas stock
Here are a few qualities to consider while shopping for natural gas stocks.
A positive value for earnings per share
A firm’s earnings per share (EPS) equals its current revenue minus dividends, divided by the total number of outstanding shares. Even with heavy debt loads, a natural gas company can be considered profitable if its earnings per share (EPS) is in the black (especially if it is a very new company). Check to determine if the company has maintained a positive EPS for at least the past few quarters before investing in natural gas stocks with a positive EPS.
A consistent and secure dividend yield
Stocks in the energy sector are popular among dividend hunters because so many companies in this sector pay them. A dividend is a portion of a company’s earnings that is paid out to shareholders on a regular basis (annually, monthly, or quarterly).
If you’re looking for stocks with a high dividend yield but are tempted to buy only based on their yearly dividend distribution, you should look further. To get the dividend yield, we need to divide the current stock price by the company’s current annual payout. You should look for stocks with dividend yields below 10%, as this indicates that the dividend is sustainable and not likely to be cut in the foreseeable future.
A significant market capitalization
The market capitalization of a corporation is determined by multiplying the number of outstanding shares by the current market price per share. Due to the fact that natural gas prices can fluctuate daily and fall drastically when demand is low, investing in a large-cap firm with a larger market capitalization helps protect your money. Consider organizations with market capitalizations exceeding $10 billion; investments in these companies are typically safer and more stable.
It is a global Saudi Arabian petroleum and natural gas business with headquarters in Dhahran, Saudi Arabia. Bloomberg News reports that Saudi Aramco is the world’s most lucrative firm, and Saudi Aramco has the highest daily oil production of all oil-producing enterprises, at 270 billion barrels. The Saudi Arabian government owns the corporation and generated USD 355.9 billion, making it one of the world’s top natural gas producers.
EQT Corporation is the nation’s largest natural gas producer. The corporation concentrates on gas production 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 a daily basis, it generated an average of 5.5 billion cubic feet of natural gas equivalent. EQT would be the twelfth largest gas producer in the world if it were a country.
EQT’s size affords it economies of scale, making it one of the world’s least expensive natural gas producers. Additionally, it has the greatest credit profile among its peers, granting it access to low-cost finance and further decreasing expenses. These characteristics place EQT in a position to generate substantial free cash flow.
The company anticipates generating cumulative free cash flow in excess of $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. It has an upside potential if prices increase.
EQT aims to spend a portion of its free cash flow on repaying debt and strengthening its financial position in the foreseeable future. It plans to repay $1.5 billion in maturing debt until 2023. This would leave the corporation with substantial excess cash for shareholder-friendly activities such as dividends, share repurchases, and accretive acquisitions. Late in 2021, it initiated a $1 billion share repurchase program, 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. In 2021, it paid $2.925 billion for Alta Resource Development and $735 million for Chevron’s (NYSE: CVX) Appalachian Basin holdings. The transactions have increased its output, size, and free cash flow, establishing it as the leading gas producer in the United States.
Cheniere Energy, Inc. (NYSE:LNG)
Cheniere Energy, Inc. (NYSE: LNG) is an LNG producer situated in Houston, Texas. The firm is the largest LNG producer in the United States and the second largest worldwide.
Cheniere Energy, Inc. (NYSE: LNG) and Chevron Corporation (NYSE: CVX) struck an agreement on June 22 to deliver two million tonnes of LNG annually. The agreement stipulates that initial deliveries will begin in 2026 and continue until 2042. By 2040, Shell plc (NYSE: SHLC) predicts that the LNG demand will nearly triple to 700 million tonnes.
Elvira Scotto of RBC Capital raised Cheniere Energy, Inc. (NYSE: LNG) price target from $151 to $178 on May 23. The analyst maintained her Outperform recommendation on Cheniere Energy, Inc. (NYSE: LNG) shares because she believes the firm will benefit from the global LNG boom.
Kinder Morgan is a leader in the operation of North American energy infrastructure, holding the continent’s largest natural gas transmission network. It had 71,000 miles of natural gas pipes and 700 billion cubic feet of storage capacity as of early 2022. The infrastructure of Kinder Morgan connects all significant natural gas resource plays to key consumption areas. It handles approximately 40% 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 in addition to natural gas. The business produces petroleum, renewable natural gas (RNG), and LNG.
The major natural gas infrastructure business of Kinder Morgan generates relatively predictable cash flow. 94% of the total revenue is derived via take-or-pay contracts, other fee-based arrangements, and hedges. This allows them to generate annual free cash flow in excess of $4 billion.
Kinder Morgan devotes its cash flow between a high-yielding dividend, share repurchases, and the expansion of its natural gas network via capital expenditures and acquisitions. The corporation entered 2022 with a backlog of $1.4 billion in growth projects, of which around 45 percent involved natural gas-related infrastructure.
In the previous year, acquisitions have become an important growth driver. In 2021, Kinder Morgan concluded two substantial agreements. The company paid $1.22 billion for the Northeast pipeline and storage network Stagecoach Gas Services. It also acquired RNG maker Kinetrex Energy for $310 million.
Kinetrex is the first transaction undertaken by Kinder Morgan’s energy transition ventures business segment, which was established in 2021. This segment aims to find, evaluate, and develop commercial opportunities as the energy industry transitions to lower-carbon fuels. Kinder Morgan’s substantial natural gas infrastructure network positions it to transport lower-carbon fuel sources such as RNG and hydrogen energy, positioning it for the future of energy.
Range Resources (RRC)
Given the significance of natural gas to our nation’s energy security, Range Resources (NYSE: RRC), which is widely regarded as a pioneer of the Marcellus Shale project and one of the most active natural gas drillers in Pennsylvania, is another great option among the best natural gas stocks. Both natural gas and natural gas liquids are Range Resources’ areas of expertise (NGLs).
According to the EIA, NGLs are used as inputs in petrochemical plants, burned for space heating and cooking, and combined with fuel for vehicles. In addition, the agency observes that “higher crude oil prices contributed to higher NGL pricing, which in turn offered incentives to drill in liquids-rich deposits with large NGL concentration.”
The long-term outlook for Range Resources is positive. On the basis of the existing economics of the energy market, it is likely that the need for NGL production will expand dramatically. In addition, the rising price of crude oil inevitably has a positive effect on the profitability of NGLs.
Southwestern Energy Company (NYSE: SWN)
Southwestern Energy Business (NYSE: SWN) is a natural gas exploration and production (E&P) company based in Houston, Texas.
On June 21, Southwestern Energy Company (NYSE: SWN) approved a $1 billion share repurchase program. The initiative is anticipated to begin immediately and conclude in December 2023. In addition, Southwestern Energy Company (NYSE: SWN) aims to reach a leverage ratio of 1x to 1.5x by the end of this year and reduce its debt to $3 billion to $3.5 billion by the end of the following year. On June 15, Subash Chandra at Benchmark raised Southwestern Energy Company (NYSE: SWN) shares from a Hold rating to a Buy rating with a target price of $14 due to the excellent execution of Haynesville. According to the analyst, two major acquisitions in 2021 have helped Southwestern Energy Company (NYSE: SWN) achieve outstanding YTD results. The analyst thinks that the company’s performance will continue to improve, allowing it to return the money by mid-2023.
Coterra Energy (CTRA)
Coterra Energy (NYSE: CTRA), one of the finest natural gas stocks to buy in the segment’s medium tier, is suitable for investors seeking a potential boost to their holdings. While CTRA is up about 35% year-to-date, it has dropped more than 22% in the previous month. And during the week ending June 24, CTRA fell 6%, which is not a positive sign.
Fundamentally, though, patient investors who are able to tolerate turbulent waters should keep Coterra on their radar. The company, a hydrocarbon exploration corporation with a diversified asset base, emphasizes its adaptability, highlighting its ability to concentrate on either its oil or gas assets depending on economic and industry cycles. Coterra’s projects in Texas and Pennsylvania encompass a total of 600,000 net acres.
CTRA is modestly undervalued relative to a group of valuation indices, which is an attractive consideration for those looking for the finest natural gas stocks. In addition, Coterra boasts exceptional profitability indicators, with a return-on-equity ratio of 27% (compared to the average of 5.2% in the industry).
Devon Energy (DVN)
Devon Energy (NYSE: DVN), an independent oil and gas company, recently established a collaboration with Delfin Midstream to export LNG. The agreement lays the groundwork “for negotiating a definitive long-term tolling agreement representing 1.0 million tons per annum (MTPA) of liquefaction capacity in Delfin’s first Floating LNG vessel, with the option to add an additional 1.0 MTPA in Delfin’s first or a subsequent Floating LNG vessel.”
Devon Energy was another business featured in the aforementioned Reuters piece on prospects relating to LNG. As Europe and the world approach a new paradigm, Devon could become a prominent participant in the sub-segment in the future. It is also important to note that even if all Russian invaders are expelled from Ukraine, Russia’s politics could become turbulent.
In a cynical sense, the chaos augurs well for buying the best natural gas stocks. However, Devon Energy is no vulture. Unlike other dubious industry companies, Devon has trailed 12-month retained earnings of $3.1 billion.
Royal Dutch Shell
Last year, Royal Dutch Shell made US$344.9 billion in revenue. Royal Dutch Shell is a worldwide oil and gas business with Dutch headquarters and English incorporation. By revenue, Royal Dutch Shell is the largest firm in Europe. Royal Dutch Shell produces 9,3 billion cubic feet of natural gas per day, with 34% originating from East and Southeast Asia, 32% from Europe, and the remaining 17% from North America. Royal Dutch Shell has a market value of around 229.46 billion US dollars, making it one of the most consistent market performers available. Shell is vertically integrated and involved in all aspects of the oil and gas sector, including exploration and production, refining, transport, distribution and marketing, petrochemicals, power generation, and trading.
Antero Resources (AR)
Antero Resources (NYSE: AR) is one of the top-performing names among the best natural gas stocks to buy, having gained 82% YTD. It is an investment focused solely on growth, with no payouts. This is in contrast to other industry participants, such as Cheniere, EQT, and Kinder Morgan, which generate passive income to varying degrees.
Nevertheless, from a speculative standpoint, Antero is intriguing because its market value has decreased by over 23% during the previous month. Nevertheless, given the natural gas industry’s longer-term context, AR is probably only experiencing a healthy correction en route to additional increases. Antero’s 5% gain during trading on June 24 may be an early optimistic indication.
To ensure complete transparency, anyone who chooses to wager here must be aware of the essential risks. Even after the recent markdown, AR is viewed as substantially overpriced. Nonetheless, energy product prices will undoubtedly continue to grow, which bodes well for Antero.
China National Petroleum Corporation
Which country produces the most natural gas in the world? By revenue, China National Petroleum Corporation is the world’s largest natural gas corporation. China National Petroleum Corporation earned revenues of USD 392.9 billion in 2022, placing it at the top of this list of the world’s greatest natural gas businesses by revenue. CNPC is China’s largest natural gas producer, producing more than 109.37 million cubic meters of natural gas annually. The China National Petroleum Corporation is a prominent national oil and gas corporation of the People’s Republic of China, with headquarters in Beijing’s Dongcheng District. The corporation conducts business in Iraq, Iran, Malaysia, Syria, Kazakhstan, Uzbekistan, Afghanistan, South Sudan, Russia, and New Zealand.
BP is an international oil and gas corporation with its headquarters in London, United Kingdom. Daily production of 8.7 billion cubic feet of natural gas makes BP one of the world’s major natural gas producers. The company’s current headquarters are located in the United Kingdom, and it employs over 73,000 people throughout its various activities. BP has activities in approximately 80 countries throughout the world. BP is a vertically integrated corporation that operates in all aspects of the oil and gas sector, including exploration and production, refining, distribution and marketing, petrochemicals, power generation, and trading, in addition to natural gas production. In addition, it has interests in biofuels, wind power, smart grid technology, and solar technology.
You can buy energy stocks through a taxable brokerage account or a tax-advantaged retirement account, such as an individual retirement account (IRA).
After conducting extensive research on the energy industry, you can purchase stocks of particular companies through your preferred brokerage platform. Keep in mind that even in the energy industry, picking individual stocks is a dangerous investment; if you examine the returns of the companies listed above, you can see that some have performed far better than others.
Experts recommend adopting a diversified investment strategy for this reason. They recommend investing in tens, hundreds, or even thousands of stocks rather than a small number. This allows you to capitalize on numerous organizations’ successes while avoiding a select few’s problems. This is intended to give you increased returns over time.
You can simplify things by investing in energy sector index funds and exchange-traded funds if that sounds cumbersome (ETFs). These can be located utilizing fund screeners at your brokerage firm. Consider also stocks that track key energy sector indices, such as the S&P 500 Energy.
In recent years, natural gas investment has been difficult due to oversupply and price volatility. However, demand for more environmentally friendly fuel should continue to rise in the future years, benefiting natural gas stock stocks. Therefore, it may be a wise investment in the long run. All of these businesses have made numerous notable discoveries throughout the years. And they are all working to develop their natural gas holdings at present. If they are able to meet their production goals, these stocks are expected to experience significant price appreciation. Therefore, you must keep a watch on them.