Natural Gas Could Rise Fast, and One Producer is Poised to Gain

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Natural gas prices could rocket higher this winter, and some producers could emerge from hibernation in much stronger shape.

Morgan Stanley analyst Mark Carlucci thinks

EQT

(EQT), the largest gas producer in the U.S., can do particularly well under those circumstances and he upgraded the shares to Overweight from Equal Weight in a note on Friday.

Southwestern Energy

(SWN), another gas producer, is also improving, and Carlucci upgraded its shares to Equal Weight from Underweight.

Natural gas prices have been depressed for years because there’s simply too much of it. Natural gas is a byproduct of oil production, and a boom in oil drilling in the U.S. has also led to an increase in natural gas supplies. But oil drilling has declined amid the pandemic and is likely in for a longer slump given depressed prices. So natural gas prices are back on the upswing. What’s more, the United States has been exporting a growing amount of gas in liquefied form, helping reduce the glut in the country. If more countries switch to natural gas from coal for electricity production, this trend could continue and even accelerate.

Some of that optimism about prices was already in the stocks, Carlucci says.

“However, as tailwinds build for potentially the tightest winter gas market of the past decade, near-term risk for equities now appears skewed to the upside,” he writes.

In fact, Carlucci thinks there’s a case for natural gas to rise as high as $5 per million British thermal units (BTU), which would be a remarkable increase given that it fell to $1.47 earlier this year, the lowest level in 25 years. Now, natural gas futures are trading around $2.76, up more than 20% on the year.

Investors appear wary of EQT, a Pittsburgh-based gas producer, because they are nervous that it will try to make acquisitions, which could affect its cash flow. But Carlucci thinks the stock is in a strong position to generate high free cash flow as prices rise and that investors shouldn’t be nervous about EQT considering deals.

“While we view management’s apparent openness to M&A as a potential overhang in the market, we see well-structured consolidation as a way to improve returns, boost free cash flow, and deepen inventory,” he writes.

He thinks shares could rise to $16.50 from a recent $14.50. EQT was up 1.1% on Friday. The stock’s dividend yield is 0.8%.

Natural gas prices could swing considerably in the near-term based on the impact of hurricanes hitting the East Coast. Damage from Hurricane Laura, which made landfall on Aug. 29, caused delays in gas shipments that have hurt prices, writes Andrew Weissman, who follows gas trends at EBW Analytics Group. Hurricane Delta could have a similar impact, though initial indications are that it won’t be quite as bad. “

“Delta is now heading directly toward Lake Charles and Cameron LNG, with landfall expected later today,” Weisman writes. “While Delta is likely to come onshore as a Category 3 hurricane, it is considerably less powerful than Laura was. It still has the potential, however, to cause significant power outages and/or require additional dredging.”

Write to Avi Salzman at [email protected]