After taking a back seat to oil all year, natural-gas prices are hot again, and some analysts think the stocks of gas producers have a chance to steal the spotlight from their oilier peers. Oil prices, by comparison, have been falling lately because of a decline in demand for gasoline, among other factors.
Natural-gas futures were trading at $3.34 per million British thermal units (MMBtu) on Friday, up 33% in the past month, and up 68% since hitting a 52-week bottom of $1.99 in March. For most of the year, prices have been stuck around $2.50 per MMBtu or below, a level where producers tend to make slim profits if any at all. EQT (ticker: EQT), the largest U.S. producer, lost $67 million in its latest quarter, after having earned $891 million a year ago.
In 2022, natural-gas prices averaged $6.45 per MMBtu because the U.S. was exporting much more gas than usual to Europe. Europe depended on U.S. gas because it had stopped importing gas from Russia after its invasion of Ukraine. Natural gas declined late in the year , however, after Europe had a mild winter and ended up with an excess amount of gas in storage.
There are a few reasons behind natural gas' revival in recent weeks. Natural gas is used for heating, electricity production, and industrial applications. Demand spiked this summer as temperatures rose to new records in several parts of the country; as people used more air conditioning, they needed more electricity generated by natural gas. Weather forecasters also expect gas demand to rise this winter because an El Niño weather pattern tends to result in colder winters, which will necessitate more natural gas for heating. In addition, demand for gas from Mexico has risen as more factories move there following the latest U.S.-Mexico trade deal. The U.S. exports about 7% of its gas to Mexico, up from about 6% last year.
On the supply side, the U.S. entered the year with a glut of natural gas. But starting in the spring, producers began reducing the number of rigs they were operating because of the low prices. The number of natural-gas rigs is down by more than 20% from May levels. Those decisions are starting to pay off now, as supply growth has moderated even as demand has risen.
"The gap has been narrowing," said Nitin Kumar, an analyst at Mizuho Securities. In the latest week, U.S. gas inventories rose less than expected, a bullish development. Kumar expects prices to stay relatively strong, as the U.S. builds more terminals to export natural gas overseas in the form of liquefied natural gas (LNG). That infrastructure should be ready by late next year, and give producers access to lucrative markets in Europe and Asia.
Kumar's favorite stocks to play the natural-gas boom include Coterra (CTRA), EQT, Range Resources (RRC), and Antero Resources (AR). Coterra is attractive because it's exposed to both oil and gas, given it more optionality than other natural-gas names. He has Buy ratings on all four.
EQT is a pure-play on gas and a high-quality operator that should gain as the industry rebounds. Range Resources sends about half its gas to the Gulf Coast, meaning the company will have high exposure to LNG exports. Antero is more sensitive to natural-gas-price changes than other operators, so it should rebound more quickly if prices keep rising, Kumar says.
Oil has been the headline story in energy this year. But natural gas is starting to take over now.