Using the United States Natural Gas Fund ETF (NYSEARCA:UNG) as the bogey, it’s fair to say commodity itself remain challenged, and it’s more difficult to find the best natural gas stocks to buy. Over the past year, UNG, which tracks front-month natural gas futures, is lower by 25%.
A variety of factors are at play, namely increased adoption of renewable energy sources at both the corporate and consumer levels and the U.S. producing too much of the commodity. Those are prime ingredients in a recipe for depressed prices.
However, as UNG’s nearly 32% gain over the last month proves, investors shouldn’t be hasty in writing obituaries for natural gas stocks to buy. As the recent wave of blackouts in California proves, there’s still a place for natural gas in the U.S. energy lexicon. As temperatures surged in the Golden State, some areas fell victim to power outages because utilities companies didn’t have enough renewable energy to meet.
For those that need a little more convincing about natural gas equities, Warren Buffett recently plunked down $10 billion to purchase Dominion Energy’s (NYSE:D) natural gas transmission and storage business. That says the commodity isn’t going anywhere and with that in mind, here are a few natural gas stocks to buy:
Natural Gas Stocks to Buy: Cabot Oil and Gas (COG)
Cabot Oil and Gas is higher by 12% this year, a stellar performance relative to broader energy sector and natural gas equity benchmarks. Obviously, performance is important, but with Cabot, investors should understand why this is a natural gas stock to buy.
Consider two of the primary reasons why the broader energy sector is being punished this year: negative dividend action and markets’ discovery that when times were good, many companies in the space feasted on debt – a chicken that’s come home to roost in this year’s trying environment.
However, Cabot has the balance sheet to not only forge ahead with its capital spending plans this year, but it’s also financially sound enough to support its dividend. COG stock yields 2.4%, which is low relative to the broader sector, but that’s a plus because many of the energy sector dividend offenders this year were high-yielding stocks prior to cutting or suspending payouts.
In the second quarter, Cabot had a free cash flow deficit, but the company said it expected that condition for the first half of this year before turning positive in the back half. On a brighter note, all of its operating expenses were either in line with or below estimates during the June quarter indicating management is doing an admirable job of cost containment.
Kinder Morgan (KMI)
Down 33% year-to-date, Kinder Morgan is rebound play/redemption idea among natural gas stocks to buy. Adding to the risk/reward proposition is a dividend yield of 7.4% on KMI stock. That’s getting into an area where investors may ponder if a cut is coming.
However, Kinder Morgan, like some other energy companies, appears intent on defending its payout by way of reducing capital spending. The pipeline operator actually boosted its dividend 5% in April while saying its trimming 2020 capital spending by $700 million. Interestingly, the dividend increase was lower than expected and the company said it still intends to get the annual payout up to $1.25 per share from $1.05 today.
Although Kinder Morgan’s natural gas pipeline volumes were up 3% in the June quarter, the company felt the adverse effects of reduced oil and gas production and lower demand for refined products owing to the novel coronavirus pandemic.
In bright news, executives see incremental signs of improvement in some areas of the business, Chairman Richard Kinder has recently been a buyer of KMI stock and the company reduced debt by $10 billion since 2015.
EQT Corporation (EQT)
Saving the best for last, at least in terms of 2020 performance, there’s EQT Corp., which is higher by more than 47% this year. The Pennsylvania-based company had 17.5 trillion cubic feet of natural gas reserves at the end of 2019 and isn’t heavily involved in oil output, making it a pure natural gas stock to buy.
Aug. 21 was an interesting day for the gas producer. Citigroup initiated coverage of EQT with a “buy” rating, but Pittsburgh Steelers legend and Hall of Famer Jerome Bettis hit the company with a $66 million racial discrimination lawsuit. Bettis and his brother own a trucking company that hauled water and drilling mud to EQT sites. They allege the company severed the agreement while maintaining similar contracts with white-owned firms.
The litigation is ill-timed, particularly in the current climate, but markets will determine how this public relations issue affects EQT stock.
In the meantime, the name is positioned as winner as more states, including California, realize that in their efforts to boost renewable capacity, a backup plan in the form of natural gas is still needed. As a pure play natural gas name, EQT stock should be a winner of temperatures across the U.S. continue soaring this summer.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.