Natural Gas Prices Continue To Rally, These Stocks Should Benefit

  • Natural gas prices are likely headed higher
  • Natural gas stocks have seen significant increases in cash flow
  • Total global demand is expected to be around 4 trillion cubic meters
Natural Gas Prices Continue To Rally, These Stocks Should Benefit
Natural Gas prices continue to rise to record levels due to pressure from global demand and geopolitical issues.  The henry hub price of natural gas currently stands at $7.88 this is significantly higher than where it was pre-pandemic, where it stood at $2.89 per MMBtu. The increase largely stems from the conflict in Ukraine and monetary policy that has increasingly affected commodity prices. And with Europe recently reducing natural gas supplies from Russia on the back of a global crisis, the issue has only been further exacerbated the energy issues. Under a new plan for U.S. natural gas exports to Europe, the Biden administration planned to export 15 billion cubic tons to Europe, in order to supplement some of the shortages, but that amount is expected to be significantly surpassed on the back of excess demand.

Where are natural gas prices heading?

Natural gas prices are likely headed higher as the demand continues to outstrip supply. The current 100 BCF of supply in the US continues to be a record high, and with demand set to increase as winter approaches in most European countries, prices are likely to march higher.  Total global demand is expected to be around 4 trillion cubic meters.  

Due to the increase in prices, natural gas stocks have seen significant increases in cash flow after years of shortages, and the gains should reflect in the price of their stocks soon.

Pioneer Natural Resources (NYSE: PXD)

Based out of Irving, Texas, Pioneer Natural resources produces both oil and natural gas. The company is set to produce over 600,000 BOE (barrel-oil-equivalent)  per day in 2022, and with natural gas prices heading higher, they will likely increase their natural gas production over the next couple of quarters. The stock is currently up 51% for the year.

The company has witnessed significantly higher cash flow on the back of higher realized commodity prices, which has sent its valuation to very attractive levels of 8.89 times earnings, and a dividend yield of 9%. Considering cash flow is likely to increase as hedges wear off, and the BOE realized price is likely to head higher in the coming quarter, Pioneer's stock is well placed for a strong run moving forward.  Management also continues to increase the level of stock buybacks and return cash to investors, which should make the stock even more attractive.

Chesapeake (NASDAQ: CHK)

Chesapeake recently moved its entire operations to natural gas after years of struggling. Chesapeake has faced bankruptcies and multiple issues in the past but is now set to enjoy a strong run of form with gas prices set to hit multi-year highs.  The biggest issue that has been affecting the company is the hedging strategy, which has been diluting the revenue and profits, but as hedges normalize, cash flow should normalize as well. Chesapeake has a dividend yield of 7.8%, which provides significant returns to investors, who are looking to hedge against the current inflationary environment.

The company has been increasingly witnessing bullish bets as the turnaround situation is leading to an increasing number of bets from large institutional investors. Plus, the higher prices and subsequent improvements to margins that are expected should see an already cheap valuation fall further.

Diamondback Energy (NASDAQ: FANG)

Diamondback Energy is another natural gas producer that has seen significant improvement in its earnings as its Permian-gas operations have started to pay dividends. Natural Gas sales almost doubled and the company is set to increase production going into the second and third quarters. The company currently trades at a valuation of 7x earnings. Operating cash flow came in at $1.17 billion for the latest quarter. The company also continues to buy back shares like many competitors in the natural gas industry from the increased cash flow.

Adding to the positive, Diamondbacks valuations are to fall further as increased production and better realized prices bring in improved cash flow.  The dividend yield is on the lower side, but the potential upside for the stock is what makes the company attractive. A number of analysts have raised their price targets for the stock in recent times, indicating that general sentiment for the stock remains bullish.