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The Pullback In Natural Gas Has Created An Opportunity

US natural gas prices have a fresh six weeks low, closed at $7.75/MMBtu Monday, with the Wall Street Journal saying the market has lost momentum as US manufacturing surged above 100 Bcf/day for the first time. There is a good chance that ample production in the US will be enough to meet local demand in the final months before the winter. Prices are likely to remain low unless storm activity breaks out in the Gulf of Mexico that could disrupt production.

Meanwhile, European benchmark gas prices have continued to fall, falling nearly 9% on Monday to their lowest in two months thanks to the improvement in European energy markets thanks to a combination of successful policy measures and a price-induced demand response. Indeed, German Economics Minister Robert Habeck has revealed that the natural gas storage levels approaching 90% giving it a chance to get through the winter season. However, he warned that the gas storage will likely be empty by the end of winter.

Of course, natural gas and LNG stocks have lost some momentum in addition to the commodity they are tracking. For example the United States Natural Gas Fund, LP (NYSEARCA: LNG) is down 20.3% in the past 30 days but is still up 108.9% in the year so far. However, the structural headwinds are likely to remain larger than the ‘cyclical headwinds’ as Strategas Securities LLC partner and chief of technical analysis Christopher Verrone told Bloomberg. Investors should therefore use the latest downturn in gas stocks as a buying opportunity. Here are some top picks.

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Market cap: 42.1B

YTD returns: 64.0%

Cheniere Energy, Inc. (NYSE: LNG) is an energy infrastructure company primarily engaged in the liquefied natural gas (LNG) business 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 the Creole Trail Pipeline, a 94-mile pipeline connecting the Sabine Pass LNG terminal to several interstate pipelines; and operates the Corpus Christi Pipeline, a 32.5-mile natural gas supply pipeline connecting the Corpus Christi LNG terminal to several interstate and intrastate natural gas pipelines.

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Back in March, the DoE approved extended permits for Cheniere Energy’s Sabine Pass terminal in Louisiana and the Corpus Christi plant in Texas. The approvals will 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 are already producing more gas than covered by previous export licenses.

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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 proven natural gas, NGL and crude oil reserves across approximately 2.0 million gross acres, including 1.7 million gross acres in the Marcellus game.

EQT Corp. has unveiled a plan aimed at producing more liquefied natural gas by dramatically increasing the natural gas drillings in Appalachia and around the country’s shale basins, as well as the capacity of pipelines and export terminals, which it said would not only improve the energy security of the United States. States would improve, but also help break the global dependence on coal and on countries such as Russia and Iran.

Market cap: $12.6B

YTD Yield: 40.0%

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

The company’s principal assets are Permian in western Texas and Anadarko in western Oklahoma; and Montney in northeastern British Columbia and northwestern Alberta. The other upstream assets include Bakken in North Dakota and Uinta in central Utah; and Horn River in northeastern British Columbia, and Wheatland in southern Alberta.

In June, Mizuho raised OVV to $78 from $54 (accounting for nearly 60% upward direction to its current price), citing a better tailwind.

#4. Devon Energy Corp

Market capitalization: $43.2 billion

YTD returns: 47.8% BofA analyst Doug Leggate has advised investors to focus on oil companies with the potential to grow their free cash flows through consolidations or other cost-cutting measures. Devon Energy (NYSE: DVN), Natural Resources Pioneer (NYSE: PXD), and EOG Resources (NYSE: EOG).

Devon fits that playbook on a tee, and although Leggate issued his advice earlier this year, the case for this is only getting stronger.

DVN stocks were one of the best performing energy stocks thanks to strong earnings and continued cost discipline, including a variable dividend structure.

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After the merger with WPX Energy last year, the company announced fixed-plus-variable dividends, something that has gone down well with Wall Street. In the second quarter, Devon paid up to 50% of the free cash as a variable dividend, bringing the total dividend to $1.55 per share. The stable part is indifferent and currently yields just over 1%. But if the final convertible bond payout is a sign of the future, shareholders could get closer to 10% overall.

Some Wall Street analysts had previously pointed to the potential for DVN to hit a dividend yield of as much as 8% by the end of the year. Devon has already surpassed that and now has a juicy estimated dividend yield of 9.7%.

#5. Chesapeake Energy Corp.

Market Capitalization: $12.4 Billion

YTD returns: 65.8%

Commodity hedging is a popular trading strategy often used by oil and gas producers and by large consumers of energy commodities, such as airlines, to protect themselves from market fluctuations. In times of declining crude oil prices, oil and gas producers normally use a short hedge to hold oil prices in if they believe prices are likely to go lower in the future.

Unfortunately, hedging also means that these companies cannot reap the benefits of rising gas prices and can in fact lead to hedging losses. However, some daring producers bet only minimally or not at all on a commodities rally hedge.

Tudor Pickering rates Chesapeake Energy (NYSE: CHK) a Buy, the company says remains one of the few producers to remain relatively uncovered.

This may seem like an odd choice given Chesapeake’s history, but somehow it makes sense at this point.

Chesapeake Energy is widely regarded as a pioneer of fracking and the king of unconventional drilling. It is in dire straits after taking on too much debt and expanding too aggressively. Chesapeake borrowed heavily for years to fund an aggressive expansion of its shale projects. The company managed to survive only through sales rounds (which management hates), debt restructuring and M&A but couldn’t prevent the inevitable – Chesapeake asked for Chapter 11 in January 2020, becoming the largest U.S. oil and gas producer seeking bankruptcy protection in recent years.

Satisfying, Chesapeake successfully emerged from bankruptcy last year with the ongoing commodities rally that provided the company with an important lifeline.

The new Chesapeake Energy has a strong balance sheet with low leverage and a much more disciplined CAPEX strategy.

The company aims at <1x langetermijnhefboomwerking in een poging de balanssterkte te behouden, de beoogde productie is 400+ duizend vaten/dag en is van plan de CAPEX te beperken tot $700-750 miljoen aan jaarlijkse kapitaaluitgaven en positieve vrije kasstroom. CHK zegt in de komende 5 jaar >Generate $2 billion in FCF, enough to significantly improve its financial position.

By Alex Kimani for Oilprice.com

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