Natural Gas Stocks Face Rocky Road: 2 Companies to Consider
The U.S. Energy Department's latest inventory report revealed another smaller-than-expected build in natural gas supplies, giving futures a modest lift. Prices edged up slightly week over week, but the commodity is still down around 8% year to date.
Natural gas faces persistent headwinds, with the market highly sensitive to erratic weather patterns that sway prices and disrupt stability. For now, investors should keep their eyes on resilient stocks like Range Resources RRC and Coterra Energy CTRA, while they should steer clear of risky prospects like Comstock Resources CRK.
Natural Gas Build Smaller Than Market Expectations
Stockpiles held in underground storage in the lower 48 states rose 40 billion cubic feet (Bcf) for the week ended Sept. 6, below analysts’ guidance of a 48 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 67 Bcf and last year’s growth of 50 Bcf for the reported week.
The weekly build put total natural gas stocks at 3,387 Bcf, which is 198 Bcf (6.2%) above the 2023 level and 296 Bcf (9.6%) higher than the five-year average.
The total supply of natural gas averaged 107.8 Bcf per day, down 0.8 Bcf per day on a weekly basis, due to lower shipments from Canada and falling dry production.
Meanwhile, daily consumption dropped to 96.8 Bcf from 99.1 Bcf in the previous week, mainly reflecting lower natural gas consumed for power generation.
Natural Gas Prices Finish a Little Higher
Natural gas prices edged up last week, driven by a smaller-than-expected inventory build. October futures settled at $2.31 on the New York Mercantile Exchange, a 1.3% rise from the prior week’s close. Still, this modest gain comes after a sharp drop — natural gas has plunged over 25% in the past three months, erasing the 47% gains seen in April and May. Prices even hit a four-month low of $1.88 in late August, highlighting the market’s volatility.
Investors should note that natural gas prices are under pressure from strong production, elevated stockpiles, and weak weather-driven demand. Current inventories are well above both last year’s levels and the five-year average, pointing to a bearish outlook for the commodity. In response, key players like APA Corporation APA and EQT Corporation EQT have scaled back on new drilling activities.
APA plans to cut natural gas output by 90 million cubic feet per day (MMcf/d) in the third quarter, following a second-quarter reduction of 78 MMcf/d in response to low price realizations. At the same time, EQT, the largest U.S. natural gas producer with a focus on the Appalachian Basin, will maintain a daily production cut of 0.5 billion cubic feet through the second half of the year.
Ironically, some of these companies had just resumed production previously deferred during the April-May price recovery. However, the renewed output quickly weighed on prices again, underscoring the fragile balance in the market.
On the demand side, steady LNG feed gas deliveries provide a solid catalyst for natural gas. U.S. LNG exports have remained strong, driven by environmental policies and Europe’s effort to reduce reliance on Russian natural gas amid the ongoing conflict in Ukraine. The global LNG market is also preparing for a robust winter season, which could stretch into early 2025, with positive signals from the seaborne cargo market and heightened risks of supply disruptions.
Final Thoughts on Natural Gas Stocks
The natural gas market continues to grapple with oversupply, still reeling from a tough 2023 when prices briefly fell below $2 for the first time since 2020.
A fleeting rally, buoyed by favorable weather and reduced production, provided a temporary relief. But prices have since slipped again, prompting further output cuts by producers.
Amid these erratic swings, the market remains highly volatile, vulnerable to abrupt changes in weather and production dynamics. Investors should tread carefully, focusing on fundamentally robust stocks like Range Resources and Coterra Energy.
Range Resources
Range Resources: The company is an U.S. independent natural gas producer with operations focused in the Appalachian Basin. Range Resources’ large contiguous acreage position provides more than 30 years of low-breakeven, high-return inventory. This Zacks Rank #3 (Hold) company produced an average of 2,152.9 million cubic feet equivalent daily from these assets in the second quarter of 2024 – 69% natural gas.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Range Resources beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 31.6%. Valued at around $7 billion, RRC has fallen 7.7% in a year.
Coterra Energy
Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, the firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. This #3 Ranked company churned out an average of 2,779.8 million cubic feet daily of the commodity from these assets in the June quarter.
Coterra beat the Zacks Consensus Estimate for earnings in two of the trailing four quarters and missed in the other two, the average being 5.9%. Valued at around $16.8 billion, CTRA has fallen 18.3% in a year.
On the other hand, companies like Comstock Resources appear risky in the near term. CRK is a leading independent natural gas producer with operations focused on the Haynesville Shale in North Louisiana and East Texas.
Reflecting the negative sentiment around natural gas, the Zacks Consensus Estimate for the Zacks Rank #5 (Hold) company’s EPS has seen downward revisions. Over the past 30 days, analysts have lowered their estimates for both the current quarter and fiscal year by 43% and 37%, respectively.
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APA Corporation (APA) : Free Stock Analysis Report
Comstock Resources, Inc. (CRK) : Free Stock Analysis Report
Range Resources Corporation (RRC) : Free Stock Analysis Report
EQT Corporation (EQT) : Free Stock Analysis Report
Coterra Energy Inc. (CTRA) : Free Stock Analysis Report