Since the start of the pandemic, oil demand decreased significantly. However, natural gas demand fared much better. According to the International Energy Agency, the U.S. will see a demand decline of around 2% in 2020. Colder weather typically means investors turn their attention to natural gas stocks. Today, we will discuss three natural gas stocks to buy into the year’s end.
The U.S. is the leading producer of natural gas, an important commodity. Natural gas currently meets about 20% of the global energy needs. Over the past decade, “80% of growth has been concentrated in three key regions: the United States, where the shale gas revolution is in full swing; China, where economic expansion and air quality concerns have underpinned rapid growth; and the Middle East, where gas is a gateway to economic diversification from oil.”
The U.S. Energy Information Administration provides comprehensive statistics regarding natural gas production and use stateside. In 2019, there were around 70 million residential, 5.5 million commercial and 183 thousand industrial customers using natural gas. We use natural gas in heating, cooking and electricity generation as well as a fuel.
Douglas Mugabe of West Virginia University and his colleagues point to the growth of the industry: “Advances in the unconventional natural gas production technology (horizontal drilling and hydraulic fracturing) have transformed the energy industry and markets. Daily production of US dry shale increased from 2.5 to 43 billion cubic feet from 2002 to 2016. By mid-2017 the US has become a net energy exporter.”
Here are three natural gas stocks that deserve to be on your watchlist:
- Cabot Oil & Gas Corp (NYSE:COG)
- Kinder Morgan (NYSE:KMI)
- United States Natural Gas Fund (NYSEARCA:UNG)
Natural Gas Stocks: Cabot Oil & Gas Corp (COG)
First on our list of natural gas stocks is Houston-based Cabot, an independent oil and gas firm whose resource base is located in the continental U.S. The company mainly focuses on the Marcellus Shale, “the largest natural gas field in the United States and one of the largest in the world.”
In late October, the company reported Q3 earnings. Revenue was $291.04 million, compared $429.11 million last year. Adjusted net income came at $37.3 million, translating into adjusted earnings of 9 cents per share. A year ago, they had been $119.7 million and 29 cents, respectively.
Net cash provided by operating activities was $129.1 million, compared to $270.9 million in the prior-year period. Natural gas price realizations, including the impact of derivatives, were $1.57 per thousand cubic feet (Mcf). That meant a year-over-year decline of 26%.
CEO Dan Dinges said, “2020 has proven to be the most challenging year for natural gas prices in the last 25 years, resulting from a multi-year trend of overcapitalization of both oil and natural gas assets across our industry.”
Yet he sounded hopeful for the future and said, “Based on the current NYMEX futures, we expect to generate between $125 and $150 million of free cash flow during the fourth quarter, resulting in our fifth consecutive year of positive free cash flow generation, despite the expectation for the lowest average annual NYMEX natural gas price on record since 1995.”
Year-to-date, COG shares are down about 2%. Forward P/E and P/S stand at 14.60 and 2.44. Long-term investors who also share Dinges’ enthusiasm for 2021 may consider buying the dips.
Kinder Morgan (KMI)
Kinder Morgan, another Houston-headquartered company, is second on the natural gas stocks list. It is one of the largest midstream energy companies stateside. Like Cabot, its focus is also on natural gas.
InvestorPlace.com readers likely know Kinder Morgan as the natural gas pipeline giant. The group “own[s] an interest in or operate[s] approximately 83,000 miles of pipelines and 147 terminals and [is] the largest energy infrastructure firm in the S&P500. [Its] pipelines transport natural gas, gasoline, crude oil, carbon dioxide (CO2) and more. [Its] terminals store and handle petroleum products, chemicals and other products.”
On Oct. 21, the company announced Q3 financial results. Revenue was $2.92 billion, compared $3.21 billion to a year ago. Adjusted earnings were 21 cents per share.
“We are now in the seventh month of an unprecedented reduction in energy demand due to the pandemic,” CEO Richard Kinder said. “Yet our company continued to produce considerable earnings and robust coverage of this quarter’s dividend.”
So far in the year, KMI stock is down close to 40%. Forward P/E and P/S stand at 8.64 and 4.70. Passive-income seekers may begin to find value in the shares. Its robust asset portfolio will continue to support its operations and cash flow.
United States Natural Gas Fund (UNG)
Next in this discussion of natural gas stocks is an exchange-traded product, the United States Natural Gas Fund. It tracks in percentage terms the daily movements of natural gas prices delivered at the Henry Hub, Louisiana.
The benchmark is the front-month futures contract on natural gas as traded on the NYMEX. Thus fund managers use derivatives and roll futures contracts to achieve the daily price change. About two weeks before expiry, the fund will roll exposure into the second-month contract. This rolling usually creates losses. Therefore, UNG is suited to be used as a short-term trading tool, and not a long-term investment.
Abebe Hailemariam and Russell Smyth of Monash University, Australia state, “in recent years, volatility in natural gas prices has increased significantly. Increased volatility reflects several factors that affect supply and demand in the natural gas market, including weather, new technologies, the shale revolution and economic and political events.”
Those experienced traders who are looking to participate in the daily moves in natural gas may want to research the fund further. However, long-term investors should ideally keep away from UNG. The fund’s multi-year returns are abysmal, losing most of its value.