The oil sector has lately been hogging the limelight after a spectacular recovery that has seen the sector become one of the top performers in the current year. However, it's natural gas bulls who have been having a real ball with natural gas trading at its highest levels since 2014, outpacing oil and many other commodities.
On Friday, natural gas futures were trading up 0.9%, to $5.67 per million British thermal units (BTUs), their highest settlement price since February 2014. Natural gas prices are up 132.3% year-to-date while the biggest nat. gas benchmark, the United States Natural Gas ETF, LP (NYSEARCA:UNG) is up 109.6% over the timeframe.
Given this backdrop, buying stocks of natural gas producers would seem like the straightforward way to play the natural gas boom. Unfortunately, it isn't quite that simple since most producers have hedged their production for 2021 and most of 2022 at prices well below $3/MMBtu.
A Barron's analysis this weekend outlines three methods to play in this market.
#1. Large Gas Producers
Truist analyst Neal Dingmann believes investors can get natural gas exposure while also benefiting from rising oil prices by buying stocks of oil companies that also happen to be large gas producers.
His top picks in this category are:
Cimarex Energy (NYSE:XEC), on the verge of merging with Cabot Oil & Gas (NYSE:COG), which so far is unhedged on 2022 production. Last month, Mizuho picked Cimarex Energy as a favorite stock to play the natural gas boom.
Mizuho upgraded XEC to Buy from Neutral with a $95 price target, citing the company's "now-attractive free cash yield" following recent weakness and the payout capacity of its merger with Cabot Oil & Gas.
Mizuho says the combined entity trades at an attractive value compared to oil peers and at "just a small premium" vs. gas peers following weakness since the merger announcement.
"Balance sheets have improved significantly YTD, positioning the group for attractive cash return not only at $65/bbl but through the cycle, and we remain very constructive for that reason, with average upside 46% in our oil coverage," Mizuho's Vincent Lovaglio writes.
Natural gas already makes up the majority of Cimarex's production which should climb even further after its merger with Cabot, another primary nat. gas producer.
Dingman has also tapped Marathon Oil (NYSE:MRO), where natural gas and natural gas liquids account for nearly half of production and has reported relatively few hedges for the current year and next.
Dingman says larger oil companies also tend not to hedge production and picks Royal Dutch Shell (NYSE:RDS.A), a major producer of propane, whose prices have also skyrocketed.
#2 Natural Gas Supply Chain
The analyst says another way to play these dynamics is by buying stocks of companies that are key cogs in the global natural gas/LNG supply chain.
His top pick here is Cheniere Energy (NYSE:LNG), whose terminals on the Gulf Coast allow U.S. gas to be processed and shipped overseas. Cheniere Energy, Inc., an energy infrastructure company, engages in the liquefied natural gas (LNG) related businesses in the United States.
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. Indeed, LNG could record even stronger growth, with Woodmac saying adoption of carbon capture and storage (CCS) technology could massively boost the sector's green credentials at little extra cost.
It's a major tailwind for Cheniere given its already strong market share, with LNG shares up 64.6% in the year-to-date.
Dingman also picks small-cap Tellurian (NYSE:TELL) as providing similar exposure though more speculative than its bigger brethren. This $1.9B (market cap) company is developing a portfolio of natural gas production, LNG marketing, and infrastructure assets that includes an approximately 27.6 million tonnes per annum LNG terminal facility and an associated pipeline in Southwest Louisiana. TELL executive Chairman Charif Souki says the company will increase drilling and production this year.
#3. Petrochemical Companies
Finally, Dingman says some petrochemical companies could benefit from the natural gas boom, too. He says chemical plants with operations in the U.S. are in better shape because they're paying relatively less.
His top picks here are:
Dow Inc. (NYSE:DOW) - Dow Inc. provides various materials science solutions for consumer care, infrastructure, and packaging markets in the United States, Canada, Europe, the Middle East, Africa, India, the Asia Pacific, and Latin America. It operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials and Coatings segments.
LyondellBasell Industries (NYSE:LYB) - LyondellBasell Industries N.V. operates as a chemical company in the United States, Germany, Mexico, Italy, Poland, France, Japan, China, the Netherlands, and internationally.
By Alex Kimani for Oilprice.com
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