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The oil sector has recently taken the spotlight after a spectacular recovery that has seen the sector become one of the best performers of the current year. However, it was the natural gas bulls that really had the fun. with natural gas trading at its highest levels since 2014, overtaking oil and many other commodities.
Natural gas futures traded up 0.9% on Friday, at $ 5.67 per million British thermal units (BTUs), their highest settlement price since February 2014. Prices of natural gas are up 132.3% since the start of the year while the largest nat. gas reference, the US Natural Gas ETF, LP (NYSEARCA: UNG) is up 109.6% over the period.
In this context, buying shares of natural gas producers would seem to be the easy way to play the natural gas boom. Unfortunately, it’s not that simple since most growers have hedged their production for 2021 and most of 2022 at prices well below $ 3 / MMBtu.
A Barron analysis this weekend presents three methods to play in this market.
# 1. Large gas producers
Truist analyst Neal Dingmann believes investors can gain exposure to natural gas while benefiting from rising oil prices by buying shares of oil companies that are also major gas producers.
His top picks in this category are:
Cimarex Energy (NYSE: XEC), on the verge of merging with Cabot Oil & Gas (NYSE: COG), which is so far not hedged on 2022 production. Last month, Mizuho chose Cimarex Energy as its preferred stock to play the natural gas boom.
Mizuho upgraded XEC to buy neutral with a price target of $ 95, citing the company’s “now attractive yield on free cash” following the recent weakness and ability to pay from its merger with Cabot Oil and Gas.
Mizuho says the combined entity is trading at an attractive value relative to its oil peers and “just a small premium” over its gas peers following weakness since the merger announcement.
“Balance sheets have improved considerably since the start of the year, positioning the group for an attractive cash yield not only at $ 65 / bbl but throughout the cycle, and we remain very constructive for this reason, with an average rise 46% of our oil coverage., ”writes Vincent Lovaglio of Mizuho.
Natural gas already constitutes the majority of Cimarex’s production, which is expected to rise further after its merger with Cabot, another primary nat. gas producer.
Dingman also operated Marathon Oil (NYSE: MRO), where natural gas and natural gas liquids account for almost half of production and have reported relatively few hedges for the current year and the following year.
Dingman says big oil companies also tend not to cover production and choices Royal Dutch Shell (NYSE: RDS.A), a major propane producer, whose prices have also skyrocketed.
# 2 Natural gas supply chain
The analyst says another way to play on this momentum is to buy shares of companies that are key cogs in the global natural gas / LNG supply chain.
His first choice here is Chénière Energy (NYSE: LNG), whose terminals on the Gulf Coast process and ship US gas overseas. Cheniere Energy, Inc., an energy infrastructure company, operates liquefied natural gas (LNG) businesses in the United States.
As the global transition to cleaner energy sources is in full swing, LNG and natural gas have the advantage of being the cleanest hydrocarbon, producing half of greenhouse gas emissions and less. one-tenth of the air pollutants from coal. As a result, LNG demand is expected to grow 3.4% per year through 2035, with some 100 million metric tonnes of additional capacity needed to meet both demand growth and the decline in existing projects. . The use of natural gas in power generation capacity is expected to increase by an additional 300 GW by 2040, equivalent to 300 million tonnes of LNG, with the majority of this demand coming from Asia, especially China , India and other Southeast Asian countries.
This makes natural gas / LNG the only fossil fuel that will experience any growth over the next two decades. Goldman sees a strong ramp-up in US contracted LNG export capacity and strong spot price exposure for the remaining volume, helping Cheniere achieve free cash flow growth of around 50%. % from 2021 levels. Indeed, LNG could experience even stronger growth, with Woodmac saying adoption of carbon capture and storage (CCS) technology could massively strengthen the sector’s green references at little additional cost.
This is a positive wind for Cheniere given its already solid market share, with LNG shares up 64.6% since the start of the year.
Dingman also chooses small caps Earthling (NYSE: TELL) as offering similar, albeit more speculative, exposure than its big brothers. This $ 1.9 billion company (market capitalization) is developing a portfolio of natural gas production, LNG marketing and infrastructure assets that includes an LNG terminal of approximately 27.6 million tonnes per year and an associated pipeline in southwest Louisiana. TELL executive chairman Charif Souki said the company will increase drilling and production this year.
# 3. Petrochemical companies
Finally, Dingman says some petrochemical companies could also benefit from the natural gas boom. He says chemical plants operating in the United States are in better shape because they pay relatively less.
His top picks here are:
Dow Inc. (NYSE: DOW) – Dow Inc. provides various materials science solutions for the consumer care, infrastructure and packaging markets in the United States, Canada, Europe, Middle East, Africa, in India, Asia-Pacific and Latin America. It operates through the Packaging and Specialty Plastics, Industrial Intermediaries and Infrastructure, and Performance Materials and Coatings segments.
LyondellBasell Industries (NYSE: LYB) – LyondellBasell Industries NV operates as a chemical company in the United States, Germany, Mexico, Italy, Poland, France, Japan, China, the Netherlands and internationally .
By Alex Kimani for Oil Octobers
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