Even before broader market collapse in February, natural gas stocks were falling fast. The reason was simple: natural gas prices were plunging.
Indeed, the Henry Hub spot price, a widely-used benchmark, is at a multi-year low. Heating demand generally drives higher prices in the winter, yet warmer weather and a supply glut have blocked that traditional booster.
The worry is that these trends will continue. Shale production shows little sign of slowing down. Oil drilling actually creates significant amounts of natural gas as a byproduct, to the point that prices in the Permian Basin occasionally turn negative. Other producers simply “flare” the gas instead of bringing it to market.
Consistently warmer winters, meanwhile, may pressure demand at the same time. The trade war with China led to tariffs on LNG (liquefied natural gas) exports, further pressuring prices.
Those low prices already are having an impact. Chesapeake Energy (NYSE:CHK), which gets over 40% of its revenue from natural gas, is on a clear path toward bankruptcy barring a sudden, steep pricing reversal. As Bloomberg noted last month, giants EQT (NYSE:EQT) and Chevron (NYSE:CVX) both will take multi-billion dollar asset writedowns due to the lower-price environment.
But to contrarian investors, the plunging prices could represent an opportunity. Prices could rebound at some point, as domestic producers cut back and demand from Asia rises.
For those investors, these three natural gas stocks are worth considering. To be sure, risks remain, and these stocks look like falling knives right now. Caution, and patience, is advised. Still, even in a market that suddenly offers a number of “buy the dip” opportunities, these names do look attractive.
The simplest way to bet on a rebound in natural gas prices is to choose from the best pure-play producers. Cabot Oil & Gas (NYSE:COG) qualifies.
Despite its name, Cabot’s production is 100% natural gas at this point. And despite the low prices, Cabot remains profitable. Adjusted earnings per share in the fourth quarter, at a realized price just above $2, were 30 cents. For the year, Cabot earned $1.68 per share.
Thanks to a plunge in its share price — COG stock trades Friday at an 8-year low — the dividend now yields just over 3%. And a lightly leveraged balance sheet gives the company flexibility to either manage a downturn or look to acquire assets on the cheap.
As a pure play, Cabot is highly sensitive to natural gas prices — and, again, the news on that front can get worse. So can the near-term chart. But if and when those prices rally, so will COG stock.
Natural gas pipeline operators like Antero Midstream (NYSE:AM) have been routed in the sector-wide sell-off. AM stock, for instance, is down 71% from its all-time high.
That’s a surprising, and disappointing, outcome. Pipeline operators are supposed to be somewhat safer than producers, as their value is based on volume, not necessarily pricing. The problem is that pricing has moved to the point where investors are pricing in steadily lower volumes. Add to that financial leverage — Antero’s net debt is 3.5x its 2019 EBITDA (earnings before interest, taxes, depreciation and amortization), a ratio that will expand in 2020 — and the declines make some sense.
Investors aren’t the only ones anticipating harder times ahead. After eight years of legal battles, Williams Companies (NYSE:WMB) walked away from its Constitution pipeline on the East Coast. There are real concerns about capacity.
All that said, the declines may have gone too far. Investors should look past AM’s stunning 29% dividend yield, as the distribution almost certainly will be cut in the not-too-distant future. But Antero still should stay profitable and cash flow-positive, and volumes still hold to at least some extent. The news here isn’t great, but may not be as bad as investors seem to believe right now.
Natural gas stocks on the whole are risky in this environment. Even by those standards, Cheniere Energy (NYSEAMERICAN:LNG) is not for the faint of heart.
Cheniere liquefies natural gas produced domestically and exports it worldwide. That business model attracted shareholder optimism in the early going: LNG stock went from nearly $10 to $80 in a little over two years.
Since then, however, optimism has waxed and waned. More recently, the trade war between the U.S. and China led to tariffs placed on LNG imports. After fourth quarter earnings last week, Cheniere said that two customers had canceled contracts, and pointed investors to the low end of EBITDA guidance for 2020.
Still, from a long-term perspective, Cheniere has years of growth ahead. Valuation is a concern when considering a massive debt load over $30 billion. But as long as the company stays profitable, it should be able to refinance that debt until demand returns.
Again, even in a high-risk, high-reward sector, LNG is a high-risk, high-reward play. But for investors willing to bet big on natural gas stocks, it might be the best play.
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