Natural gas prices have been rising this year. The reason, according to the U.S. Energy Information Administration (EIA) is a warmer-than-usual summer that boosted electricity consumption for air conditioning, increased liquid natural gas (LNG) exports and flat production, which in combination led to a lower inventory build for the winter. The fact that hurricane Ida disrupted production in August also didn’t help.

The other contributing factor was that natural gas prices typically rise in times of economic expansion, because of its use in the commercial sector, as well as processing in several industrial segments like chemicals, fertilizers, paper and glass. And we know how rapidly the economy has turned around.

It’s now expected that prices will remain elevated through the winter because of the low inventories and increased demand from consumer, commercial and industrial users. And that is despite electric power consumption dropping an estimated 8.3% this year as the sector shifts some consumption to coal (the usual fallback when prices continue to rise).

The electric power sector is the largest end-use case for natural gas, and it’s highly sensitive to prices. Less elastic demand comes from things like lease and plant fuel, pipeline and distribution use, and vehicle use and these segments are likely to see steady growth through 2022.

The EIA estimates that despite increased production, natural gas inventories will be 5% below the 5-year average at the end of the 2021 injection season (October-end). Next year, demand from electricity suppliers will fall further, as additional clean energy sources come online.

Important Numbers

Henry Hub spot prices in August were $1.77 per million British thermal units (MMBtu) higher than in August 2020.

U.S. consumption of natural gas will average 82.5 billion cubic feet per day (Bcf/d) in 2021, down 0.9% from 2020, remaining more or less steady at 82.6 Bcf/d in 2022.

Residential and commercial natural gas consumption combined will rise by 1.2 Bcf/d, industrial consumption will rise by 0.6 Bcf/d and the electric power sector’s consumption will drop by 2.7 Bcf/d, or 8.3% in 2021.

Dry natural gas production will average 92.7 Bcf/d in the U.S. during 2H21—up from 91.7 Bcf/d in 1H21—and then rise to 95.4 Bcf/d in 2022.

U.S. natural gas inventories ended August 2021 at about 2.9 trillion cubic feet (Tcf); inventories will end the 2021 injection season (end of October) at almost 3.6 Tcf, which would be 5% below the five-year average.

LNG Exports

Since the U.S. is more or less replete in natural gas resource, the domestic market is well-developed with consumption balancing production more often than not, leading to low and steady prices. But the last few years have seen increased recognition across the world of LNG as a clean fuel and countries like China have made it part of their clean energy strategy.

The high demand in Europe and Asia has sent global prices soaring, which in turn has encouraged U.S. manufacturers to export. The expansion of the domestic LNG market is changing the operating dynamics with the potential for prices to rise and stay higher in the future (because of increased international demand).

Most players are involved in both natural gas and crude operations, although there’s an increased focus on natural gas of late.

Let’s consider a few cases-

Cheniere Energy, Inc. LNG

Houston, TX-based Cheniere Energy is primarily engaged in businesses related to liquefied natural gas (or LNG) through its two business segments: LNG terminal and LNG and natural gas marketing. The company, through its controlling interest in Cheniere Energy Partners L.P., owns and operates the Sabine Pass LNG terminal in Louisiana – North America’s first large-scale liquefied gas export facility.

Furthermore, Cheniere Energy owns and operates the 94-mile Creole Trail Pipeline – an interconnect between the Sabine Pass receiving terminal and the downstream markets – through its subsidiary.

Cheniere Energy intends to construct up to six trains at Sabine Pass with each train expected to have a capacity of about 4.5 million tons per annum. While Trains 1, 2, 3 and 4 are functional; Train 5 is undergoing commissioning. Train 6 is being commercialized and has secured the necessary regulatory approvals.

Cheniere Energy Partners is also developing a liquefaction and export terminal in Corpus Christi, TX. Train 1 commissioning is complete, Train 2 is under construction and Train 3 is commercialised with necessary approvals in place. The facility came online in 2019. Cheniere Energy intends to develop seven midscale liquefaction trains adjacent to the Corpus Christi Liquefaction facility (CCL).

The company has initiated the regulatory approval process. The total production capacities for these trains are expected to be approximately 9.5 Mtpa.

Additionally, Cheniere Energy is involved in LNG and natural gas marketing activities through its subsidiary, Cheniere Marketing LLC.

Global LNG demand is likely to continue growing for the next few years. Cheniere Energy, the U.S.’s only listed LNG export pure play, foresees the fundamentals of LNG to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation worldwide and in the Asia-Pacific region in particular.

While the increasing demand for gas in the European power sector will be a key factor driving near-term LNG supply, longer-term consumption is set to come from Asian importers like China, India, South Korea and Pakistan.

Being in the expansion phase of a capital-intensive business isn’t easy and the company has acquired a significant amount of debt. At the same time, its long-term contracts ensure steady cash flow and provide excellent visibility into the future.

It’s therefore particularly encouraging that Cheniere’s expected earnings growth of 976.5% this year and 119.7% next year are significantly higher than its expected revenue growth of 46.4% and 13.6%. After a correction 30 days ago, its estimates are again on the rise.

The shares carry a Zacks Rank #2 (Buy) and at 16.1X P/E, they’re trading below their median level over the past year. Definitely worth considering.

Range Resources Corp. RRC

Based in Fort Worth, TX, Range Resources is an independent oil and gas company engaged in the exploration, development and acquisition of oil and gas properties, primarily in the Appalachian Basin and North Louisiana. It is among the top 10 natural gas producers in the U.S. and is among the top NGL producers in the domestic market.

The Appalachian Basin incorporates prolific acreages in Marcellus, Utica and Upper Devonian shale formations. In the Marcellus formation of the basin, it has a multi-decade inventory of premium drilling locations.

Of the 3,100 undrilled wells in the region, 2,600 wells are liquids-rich and the rest have a natural gas predominance. Following the merger with Memorial Resource Development Corporation a few years back, Range Resources created a core acreage position in North Louisiana comprising 140,000 net acers with multiple formations of productive oil and natural gas.

The company primarily sells its produced natural gas to midstream firms, utilities, marketing companies and industrial users. It also sells natural gas liquids (NGLs) and crude oil.

As of Dec 31, 2020, total proved reserves were 17.2 trillion cubic feet equivalent (Tcfe), almost flat year over year. Around 95% of the company’s total proved reserves are located in the Marcellus region. Of the total proved reserves, roughly 57% was developed.

Despite its considerable liquid resources, the company has been focusing on natural gas production because of growing global demand for clean energy. In 2020, its total production averaged 2.23 million cubic feet equivalent per day, of which 69.4% was natural gas. A similar trend is seen this year.

Range Resources’ revenue is expected to grow 38.9% in 2021 and 3.6% in 2022. Earnings are expected to increase 2000% and 45.5%, respectively in the two years. Estimates for both years have been rising steadily: the 2021 estimate increased 47.4% in the last 90 days while the 2022 estimate increased 93.0%.

The shares carry a Zacks Rank #1 (Strong Buy). At 8.7X P/E, they’re trading below their median level over the past year, making them really cheap at these levels.

Continental Resources, Inc. CLR

Oklahoma City, OK-based Continental Resources is an explorer and producer of oil and natural gas. The company operates premium resources in the North Dakota Bakken and Montana Bakken (among the country’s largest onshore oilfields) in northern U.S., the SCOOP and STACK plays of Oklahoma in southern U.S. and undeveloped leasehold acreage in eastern U.S. It also has strategic water assets in Bakken and Oklahoma.

Given its presence in prolific regions, the company expects oil equivalent production growth of 8-10% CAGR from 2019 to 2023 which is expected to translate to average annual free cash flow of $3.5-$4 billion over the five-year period.

At the end of 2020, the company’s estimated proved reserves were 1,103.8 MMBoe. During 2020, the company produced 300,090 barrels of oil equivalent per day (Boe/d), lower than 340,395 Boe/d in the year-ago quarter. Of the total production, oil accounted for nearly 58.2%.

The company’s 2021 revenue and earnings are currently expected to grow 101.9% and 436.8%, respectively. While analysts still expect 2022 growth to be negative, estimates for both years continue to increase substantially (from $2.35 to $3.94 in 2021 and from $1.97 to $3.68 in 2022). The stronger pricing this year is clearly driving the numbers.

The shares of this Zacks Rank #1 company are currently trading at a P/S of 2.99X, which is between their median and high values over the past year, although much lower than the S&P 500. While not cheap, they can’t be considered expensive either.

Goodrich Petroleum Corp. GDP

Houston, Texas-based Goodrich Petroleum is an exploration and production company. It primarily holds interests in the Haynesville Shale Trend in northwest Louisiana and East Texas; Tuscaloosa Marine Shale Trend located in southwest Mississippi and southeast Louisiana; and the Eagle Ford Shale Trend in South Texas. The company owns interests in 189 producing oil and natural gas wells located in 37 fields in six states of the United States.

As of December 31, 2020, it had estimated proved reserves of approximately 543 billion cubic feet equivalent, which included 540 billion cubic feet of natural gas and 0.5 million barrels of crude oil or other liquid hydrocarbons of oil and condensate.

The company’s revenues are expected to grow 60.5% this year and another 22.4% in the next. Its earnings are expected to grow 1676.2% this year followed by 25.3% growth in the next. Estimates for both years are galloping ahead. In the past 90 days, they’ve gone from $2.17 to 3.73 for 2021 and from 2.74 to 4.67 for 2022.

Shares of this Zacks Rank #1 stock currently trade at 4.9X P/E, which is below their median level over the past year, and of course much lower than the S&P. They’re a steal at these levels.

Magnolia Oil & Gas Corp. MGY

Magnolia Oil & Gas is an independent upstream operator engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Headquartered in Houston, TX, the firm is focused on the high-quality Eagle Ford Shale and Austin Chalk formations in South Texas.

In South Texas, Magnolia’s position consists of more than 460,000 net acres, of which around 23,500 net acres are located in the highly productive Karnes County and nearly 440,000 net acres in the re-emerging Giddings Field.

At Dec 31, 2020, Magnolia's total estimated proved reserves were 49.3 million barrels ((MMBbls) of oil, 28.5 MMBbls of natural gas liquids (“NGL”) and 207.6 billion cubic feet (Bcf) of natural gas, totaling 112.3 million barrels of oil-equivalent (MMboe) — 69% liquids, 76% developed.

The company focuses on growth through a combination of acquisitions and active drilling. Since its inception in 2018, Magnolia has spent around 60% of operating cash flow on capital expenditures, 26% on acquisitions, 8% on stock buybacks, while preserving the remaining 6% as cash. In particular, Magnolia is focused on returning significant cash to its shareholders: it aims to repurchase 1% of its total scrips outstanding each quarter and introduce a semi-annual cash dividend in 2021.

Given the COVID-related disruption in 2020, it’s understandable that revenue and earnings are expected to jump 88.7% and 10050% this year. But the 6.7% revenue growth and flattish earnings slated for the following year are particularly encouraging.

The Zacks Rank #1 shares are trading cheap at 8.23X earnings (below median level of 12.09X over the past year).

One-Month Price Performance

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