My Top Energy Stock Pick for 2024

Before I started my holiday season vacation a couple of weeks ago, I wrote a couple of pieces looking forward to 2024. Those pieces focused on oil, which is only natural given its importance in the energy space, but as I did my research while on break, I came to the conclusion that my number one pick for 2024 was not in oil, but in an area that was somewhat uninspiring for traders and investors…natural gas.

Let’s get one thing out of the way early; I am not saying that natty will necessarily break out above the $2-$3.50 range that it has been in for most of the last year. It might, but with uncertainty about the geopolitical situation and global economic prospects in some doubt after a year of rate hikes by most central banks, that would be a very bold prediction. However, a breakdown below the year’s $2 low looks even less likely. The US market has been oversupplied for some time and that level has held through multiple tests, and the longer that goes on, the more likely it is that the market will do its thing and bring supply and demand back into balance.

So, while I am not necessarily looking for a big pop in natty early this year, I do believe there will be a solid base around $2 should we drop and some upward pressure on prices. That analysis fits with how I saw things back at the end of September, and at that time I concluded that the best way to play that outlook was not through natty itself, nor through a producer, but rather through Cheniere, a transporter and exporter of the commodity. I still believe that to be true.

The above chart for LNG since I made that call shows a couple of relevant things. First, natty did climb over the ensuing couple of months, giving a nice short-term profit on a long position. Secondly though, and more importantly in the context of a long-term call on the stock, when natural gas dropped back to below its late September level, LNG held on to most of its gains. That is the beauty of this play: LNG will climb should natty show gains as expected, but will have only a limited downside if underlying conditions in the commodity deteriorate somewhat.

There are two reasons for that resilience. The first is the specific business that they are in. The biggest and most likely reason for a decline in natural gas futures in the early part of 2024 would be the same thing that caused weakness last year, oversupply. Strangely enough, in some ways that would actually benefit LNG. Oversupply and lower domestic prices increase demand for exports, Cheniere’s area of specialty, so it is possible that even if gas prices fall, LNG’s revenue and profit will climb.

Then there is basic, fundamental value. In a stock market where multiples have been climbing and value has become increasingly hard to find, LNG’s trailing and forward P/Es of 3.4 and 12.7, respectively, will attract the attention of even investors who aren’t always fans of the oil and gas industries. Even more attractive is the PEG ratio of 0.83, which factors in projected revenue growth as well as the forward P/E. If you are unfamiliar with the PEG ratio, a value below 1.0 typically indicates a stock that is undervalued, so on that basis, LNG looks remarkably cheap.

In the previews that I have done so far for the coming year, my main theme has been that it will be a tricky one for investors. Geopolitical uncertainty, or more accurately chaos, makes for a risky global outlook, for sure. Meanwhile, in the US, making predictions about what this year will bring is tough. We can make an educated, informed guess, but with the high chance of a recession or at least a period of stagnation as the impacts of rate hikes filter through to the economy, and with it being a presidential election year in a polarized, bitterly divided country, investors must remain open to the possibility that things won’t turn out as foreseen.

In that environment, I am looking for long-term plays that have some inherent downside protection as well as decent upside and, based on its performance relative to natural gas over the last three months, LNG looks to fit that bill.

*Disclaimer: I am someone who typically puts their money where their mouth is, so just in case you didn’t work it out from the above, I will be buying LNG. I will probably already be long when you read this and will also be averaging into a larger position over the next couple of weeks.