With a global push for cleaner energy, natural gas stocks are likely to remain in focus and demand in the coming decade. The reason: Natural gas is the cleanest fossil fuel with emission of up to 50% less CO2 as compared to other fuels.
Considering this fact, it’s not surprising that McKinsey & Company estimates natural gas to be the “fastest-growing fossil fuel” until fiscal year 2035. China’s demand for natural gas has already surged and India is likely to witness strong demand in the coming years. Even in the United States, natural gas provided for 38% of the electricity generation in fiscal year 2019.
With a gradual transition in the energy industry, natural gas stocks are likely to see gowth in the coming years. And I think the following stocks will be value creators.
Natural Gas Stocks: Cabot Oil & Gas (COG)
With 12.9 trillion cubic feet equivalents (Tcfe) of total proved reserves, Cabot Oil & Gas is a name that’s worth considering in the natural gas business.
The first reason to like the company is strong fundamentals. As of FY2019, the company reported net-debt-to-EBITDAX of 0.7. Further, for the last year, the company’s free cash flow was $563 million. Importantly, Cabot Oil & Gas has continued to report positive FCF, even in a relatively depressed natural gas price scenario. As natural gas trends higher in the long term, EBITDAX margin will expand along with higher FCF generation.
From an asset perspective, the company’s focus on Marcellus has delivered positive results. The reserve replacement ratio has been robust and was 250% last year. In addition, the finding and development cost is low and cost control is one reason for positive FCF even at low gas prices. As an example, the company’s operating expense per unit for the first quarter of 2020 was $1.46/Mcfe. This includes the interest expense and G&A cost.
Clearly, cost control makes COG stock attractive. Further, the company has a robust proved reserve and a multi-year drilling inventory. This is likely to ensure steady production growth in the coming years. I am therefore bullish on the long-term price trend for COG stock.
Enterprise Product Partners (EPD)
Cabot Oil & Gas is attractive in the natural gas exploration and production segment. But in the natural gas storage and transportation business, I like Enterprise Product Partners.
As of FY2019, the partnership unit reported 50,000 miles of pipelines and 14 Bcf of natural gas storage capacity. As the market for natural gas expands, the demand for storage and transportation will grow.
From a financial perspective, EPD is well positioned. As of March 2020, the partnership unit reported $6.4 billion in liquidity. Further, the company’s leverage was 3.25 as of FY2019. With an investment grade credit rating, the unit is safe for exposure.
Looking at the revenue visibility, the top 10 customers accounted for 42% of the revenue. Importantly, 91% of these customers are investment grade companies. This ensures smooth cash flows even in challenging times.
Another reason to like EPD stock is the fact that the company has robust growth plans. As of Q1 2020, the partnership unit had $6.9 billion in major capital projects under construction. These projects will provide growth visibility for the next few years. With ample financial flexibility, financing growth projects is not a concern.
Furthermore, a strong balance sheet and liquidity position implies that the partnership will continue paying cash distribution of $1.78 per unit. Growth projects will ensure that cash distribution increases in the coming years. These factors make EPD stock interesting among the universe of natural gas stocks.
Cheniere Energy (LNG)
Cheniere Energy is a full-service LNG provider and among the attractive names in the natural gas industry.
One of the key reasons to like Cheniere Energy is the company’s long-term contracts that provide clear cash flow visibility. As of Q1 2020, the company reported over $5.5 billion in net run-rate annual fixed fee. With the average remaining life of contracts being 19 years, the company’s cash flow is likely to remain stable.
Amidst the novel coronavirus pandemic, LNG demand has been impacted. However, it’s worth noting that prior to the pandemic, “demand for LNG had grown sharply as nations like China and India shift from dirtier coal to cleaner gas for power generation and home heating.” Once the current crisis is navigated, renewed global growth will trigger demand for LNG.
From a growth perspective, Cheniere Energy reported 20% growth in top-line for Q1 2020 as compared to the prior year comparable quarter. Adjusted EBITDA growth was 60% for the same period. Clearly, the company is already on a high growth trajectory. The pandemic has impacted near-term growth and depressed Cheniere stock. However, strong growth is likely to resume once the crisis is navigated. This makes the stock worth accumulating at current levels.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.