The United States has a long-running love affair with natural gas, with fossil fuels acting as the lynchpin in the country's power generation mix, while nearly half of American homes use the fuel for heating. With the transition from fossil fuels to renewables in full swing in many states, natural gas serves as the bridge that will make the switch smoother and less jarring.
Indeed, natural gas and LNG are now being viewed as the bridge in the transition to renewable energy thanks to their more favorable emissions profile, as it generates 30% less carbon dioxide than fuel oil and 45% less than coal.
Natural gas is likely to play a prominent role even in a hydrogen economy.
After decades of stagnation and multiple false dawns, the hydrogen economy is finally taking off with some experts predicting that hydrogen could become a globally-traded energy source, just like oil and gas. A growing number of countries and industries are proactively investing in hydrogen technologies; none, however, can rival the EU’s zeal.
The European Union has set out its new hydrogen strategy as part of its goal to achieve carbon neutrality for all its industries by 2050.
In a big win for the hydrogen sector, the EU has outlined an extremely ambitious target to build out at least 40 gigawatts of electrolyzers within its borders by 2030, or 160x the current global capacity of 250MW. The EU also plans to support the development of another 40 gigawatts of green hydrogen in nearby countries that can export to the region by the same date.
The EU aims to have at least 6 gigawatts of clean hydrogen electrolyzers installed by 2024.
Good news for natural gas companies: Although Brussels clearly favors “green” hydrogen produced by renewable energy, it has signaled that it will also encourage the development of "blue" hydrogen that is produced from natural gas paired with carbon capture and storage (CCS).
Wall Street loves the sector, with Goldman Sachs saying it remains very positive on natural gas and LNG pricing:
‘‘We continue to see a favorable above mid-cycle price environment in the second half of 2021 and 2022 across the oil and gas commodity complex. For natural gas, we believe our above-mid cycle gas prices in 2021 and 2022 of ($2.99/$2.96 per MMBtu) are largely reflected in valuations and current gas futures ($3.11/$3.07 per MMBtu). However, we remain constructive on NGLs and see upside to current futures from strong demand/disciplined supply.’’
Here are three large-cap stocks ideal for growth stock investors looking to capitalize on the solid pricing and demand environment.
A frequently off-the-radar name, Denver, Colorado-based Ovintiv Inc.(NYSE:OVV) has been seeing undeniable positive prospects. Ovintiv, Inc. (NYSE: OVV), together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids. It operates through USA Operations, Canadian Operations, and Market Optimization segments.
OVV has rallied to a two-year high after CitiGroup upgraded shares to Buy from Neutral with a $43 price target, citing the company's improved balance sheet and leverage ratios, including the likely achievement of its $4.5B debt target by year-end 2021.
Although OVV shares have climbed 119.2% YTD, Citi expects additional upside thanks to higher oil prices and sees the company having attractive free cash flow at its updated price deck.
OVV stock appears ideal for investors seeking mid-cap E&P exposure without going too much further on the risk curve.
#2. Cheniere Energy, Inc. At a time when the global energy market has been decimated by Covid-19, the LNG sector is one of the few that remain in decent shape. In 2020, natural gas demand fell 3%, relatively tame compared to declines by other fossil fuels thanks to natural gas being increasingly viewed as a bridge that will facilitate the transition from coal to renewable energy especially in power generation. Even better: Liquified Natural Gas (LNG) managed to record 1% demand growth last year despite high levels of LNG market volatility with both extreme oversupply and extreme tightness during the course of the year.
After four tough quarters, Cheniere Energy (NYSE:LNG) is off to a strong start in 2021 thanks mainly to robust LNG demand. Cheniere, a leading pure-play LNG producer, has reported Q1 2021Q1 GAAP EPS of $1.54 per share beating Wall Street estimates by $0.76 while revenue of $3.09B (+14.0% Y/Y) beat by $210M.
Cheniere increased its full year 2021 Consolidated Adjusted EBITDA guidance to $4.3-$4.6 billion and full year 2021 Distributable Cash Flow guidance to $1.6 - $1.9 billion due primarily to improved market margins.
There’s good reason to believe that Cheniere can maintain this trend over the long-term.
With the global shift towards cleaner energy sources in full swing, LNG and natural gas bring the benefits of being the cleanest-burning hydrocarbon, producing half the greenhouse gas emissions and less than one-tenth of the air pollutants of coal. Consequently, LNG demand is expected to grow 3.4% per annum through 2035, with some 100 million metric tons of additional capacity required to meet both demand growth and decline from existing projects. Natural gas use in power generation capacity is expected to grow by an additional 300 GW by 2040, equivalent to 300 million tonnes of LNG, with the majority of that demand coming from Asia, especially China, India and other Southeast Asia countries.
That marks natural gas/LNG as the only fossil fuel that will experience any kind of growth over the next two decades. Goldman sees a strong ramp in contracted U.S. LNG export capacity and solid exposure to spot pricing for remaining volume helping Cheniere record free-cash-flow growth of ~50% from 2021 levels.
It’s a major tailwind for Cheniere given its already strong market share, with LNG shares up 44.5% in the year-to-date.
#3. EQT Corporation
Shares of Pennsylvania-based EQT Corp.(NYSE:EQT) are up 75.1% YTD, making the stock a top-performer in the mid-cap oil and gas sector. EQT is a pure-play natural gas company with ~19.8 trillion cubic feet of proven natural gas, NGLs, and crude oil reserves across approximately 1.8 million gross acres.
EQT is no longer in growth mode and considers acquisitions as its second act in a bid to gain economies of scale and help it return capital to shareholders, though its high-profile merger with CNX Resources (NYSE:CNX) failed to sail through.
EQT also is considering a path to net-zero status, starting by replacing equipment that runs on fossil fuels with electric-powered devices as well as using real-time sensors and other technologies in a bid to cut drilling time and energy. ESG plays within the fossil fuel sector tend to go down well with investors.
EQT continues to be a leader in the use of advanced horizontal drilling technology, designed to minimize the potential impact of drilling-related activities and reduce the overall environmental footprint.
By Alex Kimani for Oilprice.com
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