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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Why Natural Gas Stocks Are Outperforming Oil Stocks

  • Oil stocks have seen a heavy sell-off in the past couple of weeks as oil prices plunged on fears of a recession, a brawny dollar, and a hawkish Fed.
  • Natural gas stocks, on the other hand, have continued to soar as the global shortage brought about by Russia’s invasion of Ukraine shows no sign of easing.
  • Meanwhile, heatwaves in both Europe and the U.S. are sending demand for natural gas even higher, adding to the upside for natural gas stocks.

Over the past couple of weeks, oil stocks have sold off heavily, reversing a good chunk of their early-year gains thanks to a drop in oil prices due to worries of a recession, a brawny dollar, and an overly hawkish Fed.

As Citi analyst Scott Gruber has told Barron's, oil producers and oil service firms may be in "stock purgatory" for now, in part because fund managers worry that oil prices have more room to fall if a recession hits.

The energy sector's best-known benchmark, the Energy Select Sector SPDR ETF (NYSEARCA:  XLE) has lost 7.4% over the past month and seen its year-to-date returns fall to 24.9%. Meanwhile, the oil services counterpart, iShares U.S. Oil Equipment & Services ETF (NYSEARCA: IEZ) has fared even worse, losing 12.3% over the past 30 days and seeing its YTD returns trimmed to just 8.7%.

This week, oil prices reversed their trajectory after the Fed signaled it would go with a 75-point rather than a 100-point one, while the dollar has pulled back from its recent 20-year high. Still, they are a long way off their recent highs in the $120s/bbl range and lack strongly bullish catalysts to propel them forward with recession fears still rampant.

But the natural gas sector is a different beast.

You can tell that by the momentum of stocks of natural gas producers, with the United States Natural Gas Fund, LP (NYSEARCA: UNG) boasting a 91.9% YTD gain, and has even managed to add 8.0% over the past month.

According to Gruber, investors are more interested in buying gas-focused producers, thanks in large part to Russia's invasion of Ukraine, which has imperiled global natural-gas supplies, with serious concerns about Russia cutting off Europe if the west succeeds in implementing price caps. Indeed, there are growing concerns that flows may not be restored following the completion of maintenance work on Nord Stream 1. Russian national oil company Gazprom has already declared force majeure on at least three European gas buyers, meaning their supplies may be capped.

While natural gas has historically been used mostly for heating, it has become a more prominent source of electricity generation here in the U.S. and elsewhere. Meanwhile, heat waves in Europe and the U.S. this summer have seen natural gas demand for cooling purposes go up dramatically. The heat already has raised power demand to record levels in Texas, with ERCOT recently admitting that it was unprepared for this level of demand.

For investors interested in the gas business, here are some top natural gas picks.

 

  • Cheniere Energy

 

Market Cap: 31.6B

YTD Returns: 26.9%      

Cheniere Energy, Inc. (NYSE: LNG) is an energy infrastructure company that primarily engages in the liquefied natural gas (LNG) related businesses in the United States. Cheniere is one of the few pure-play LNG companies in the United States; the company owns and operates the Sabine Pass LNG terminal in Cameron Parish, Louisiana; and the Corpus Christi LNG terminal near Corpus Christi, Texas. The company also owns Creole Trail pipeline, a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with various interstate pipelines; and operates the Corpus Christi pipeline, a 21.5-mile natural gas supply pipeline that interconnects the Corpus Christi LNG terminal with various interstate and intrastate natural gas pipelines. 

Back in March, the DoE approved expanded permits for Cheniere Energy's Sabine Pass terminal in Louisiana and its Corpus Christi plant in Texas. The approvals allow the terminals to export the equivalent of 0.72 billion cubic feet of LNG per day to any country with which the United States does not have a free trade agreement, including all of Europe. Cheniere says the facilities already are making more gas than is covered by previous export permits.

 

  •  EQT Corp.

 

 Market Cap: 13.6B

 YTD Returns: 78.0%     

EQT Corporation (NYSE: EQT) operates as a natural gas production company in the United States. The company produces natural gas, natural gas liquids (NGLs), including ethane, propane, isobutane, butane, and natural gasoline. 

As of December 31, 2021, EQT had 25.0 trillion cubic feet of proved natural gas, NGLs, and crude oil reserves across approximately 2.0 million gross acres, including 1.7 million gross acres in the Marcellus play. 

EQT Corp. has unveiled a plan centered on producing more liquified natural gas by dramatically increasing natural gas drilling in Appalachia and around the country's shale basins, as well as pipeline and export terminal capacity, which it said would not only boost United States energy security, but also help break the global reliance on coal and on countries like Russia and Iran.

 

  • Ovintiv 

 

Market Cap: $11.2B

YTD Returns: 28.8%

Ovintiv Inc.(NYSE: OVV) is a Denver, Colorado-based energy company that, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids.

The company's principal assets include Permian in west Texas and Anadarko in west-central Oklahoma, and Montney in northeast British Columbia and northwest Alberta. Its other upstream assets comprise Bakken in North Dakota, and Uinta in central Utah; and Horn River in northeast British Columbia, and Wheatland in southern Alberta. 

Last month, Mizuho upgraded  OVV to $78 from $54 (good for 32% upside to current price), citing improving tailwinds.

 

  • NuVista Energy Ltd

 

Market Cap: $1.7B

12-Month Returns: 36.3%

NuVista Energy Ltd. (OTCPK: NUVSF)(TSX: NVA) is a  Calgary, Canada-based oil and natural gas company that engages in the exploration, development, and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. The company primarily focuses on the condensate-rich Montney formation in the Wapiti area of the Alberta Deep Basin. 

NuVista is reaping huge dividends for its massive investments in the natural gas business.

Last year, the company's adjusted cash flows more than doubled and allowed the company to pay down a significant amount of its long-term debt. The company is targeting a long-term sustainable net debt target of less than 1.0 times adjusted funds flow in the stress test price environment of US$ 45/Bbl WTI and US$ 2.00/MMBtu NYMEX natural gas, representing a target net debt level of $200 - $250 million.

 

  • Birchcliff Energy Ltd

 

Market Cap: $1.8B

12-Month Returns: 36.6%

Another Calgary-based energy company, Birchcliff Energy Ltd.(OTCPK: BIREF)(TSX: BIR) is an intermediate oil and natural gas company, acquires, explores for, develops, and produces natural gas, light oil, condensate, and natural gas liquids in Western Canada.

The company holds interests in the Montney/Doig resource play located approximately 95 km northwest of Grande Prairie, Alberta. Its asset portfolio also includes various other properties, including the Elmworth and Progress areas of Alberta. As of December 31, 2021, the company had interests in 200,712 net acres of undeveloped land, as well as proved plus probable reserves of 1,022 million barrels of oil equivalent. 

A couple of years ago, Birchcliff was struggling thanks to low natural gas prices and a high net debt position. But the situation has improved dramatically, and Birchcliff is taking advantage of the strong gas price to rapidly reduce its net debt.

By Alex Kimani for Oilprice.com

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