Natural gas prices have already moved up big-time, but could be headed even higher. Why?
Last year, Russia provided almost half of the European Union’s natural gas imports. Then, a few weeks ago, triggered by Ukraine invasion issues, Russia cut the natural gas flow to Europe by around 80%.
The U.S. is filling much of that gap by shipping liquefied natural gas (LNG) to Europe. The increased demand is what triggered the recent natural gas price hikes. Forecasts are all over the place, but it’s possible that LNG exports will continue to increase substantially, thereby pushing nat-gas prices much higher. There are three ways you could profit if that happens.
The most straightforward way would be to hold shares in an ETF that simply tracks natural gas prices. The other two ways involve holding stocks of corporations that either produce natural gas, or produce liquefied natural gas for shipping overseas.
Next, I’ll describe three picks, depending on which approach you want to follow.
Natural Gas ETF
United States Natural Gas Fund (UNG) utilizes futures contracts to track the spot prices of natural gas delivered at the Henry Hub, Louisiana distribution center.
As of August 24, the fund was up 159% year-to-date, but those spot prices tend to be volatile on a short-term basis. For instance, on June 30, the fund closed at $10.01 per share, down 51% from the June 8 $20.41 close. Then, by August 24, prices had surged 56% to $31.83. This ETF does not pay a dividend and charges a 1.35% management fee.
While UNG earnings directly track nat gas prices, the next two picks could enjoy higher earnings by simply increasing production, even if nat gas prices remain constant or even drop.
Natural Gas Producer
EQT Corporation (EQT): EQT, founded in 1878, is the largest, and possibly the lowest cost natural gas producer in the U.S. It also produces butane, ethane, propane and other natural gas liquids (NGLs). Operating in the natural-gas rich Appalachian Basin (portions of West Virginia, Pennsylvania, Ohio, Maryland, Kentucky and Virginia), EQT has around 25 trillion cubic feet of proved natural gas preserves.
Analysts are expecting EQT to report earnings of $3.89 per share this year, and powered by 44% revenue growth, roughly double that number to $7.93 per share next year. Recently trading at around $50 per share, EQT with a forward P/E (based on this year’s expected earnings) of 17, and a 1.7 price/sales ratio. Based on those numbers, EQT could be considered undervalued.
EQT recently raised its quarterly dividend by 20% to $0.15 per share, which equates to a 1.3% dividend yield.
Cheniere Energy (LNG): Where feasible, natural gas is typically shipped via pipelines. However, to be shipped overseas, natural gas must be cooled to around minus 260 degrees Fahrenheit, a process termed “liquefaction.” When liquefied natural gas (LNG) arrives at its final destination, it is returned to its gaseous state (regasification).
Cheniere, with liquefaction terminals on the U.S. Gulf Coast is the largest U.S. producer of liquefied natural gas. Its Sabine Pass facility in Louisiana began operating in 2016 and its Corpus Christi, Texas plant went online in 2018. Analysts are looking for annual EPS of $8.61 this year and up 75% to $15.08 in 2023. With a forward P/E of 12.4 and a 1.7 price/sales ratio, Cheniere could also be considered undervalued. Chenier pays a $0.33 per share quarterly dividend which equates to an 0.8% annual yield.
Those are my ideas, but do your own due-diligence. The more you know about your stocks and funds, the better your results.