Winter months typically put natural gas stocks in the limelight. Energy consumption has made a remarkable rebound this year from pandemic-induced low levels. For instance, despite the recent pullback in price, natural gas prices have surged over 80% so far in 2021. Meanwhile, the S&P GSCI Natural Gas Index Spot is up 68% year-to-date (YTD).
Understandably, the long-term increase in price follows demand as well as trading volumes. According to the International Energy Agency (IEA), “Natural gas is the fastest growing fossil fuel, accounting today for 23% of global primary energy demand and nearly a quarter of electricity generation.”
For instance, natural gas is a vital energy and feedstock source. A recent S&P Global (NYSE:SPGI) Market Intelligence report highlights that the increased use of electric vehicles (EVs) should create additional demand for natural gas as well. Thus, the industrial consumption of natural gas is not affected much by short-term price fluctuations.
The U.S. Energy Information Administration (EIA) anticipates industrial natural gas consumption to increase in 2021 and 2022, exceeding pre-pandemic 2019 levels. In that case, it would be “near the current record high for annual industrial natural gas consumption set in the early 1970s.”
With expectations of a cold winter knocking on the door, the demand for natural gas could continue to remain high. Let’s now take a look at three top natural gas stocks with potential to gain traction in 2022:
Natural Gas Stocks: Cheniere Energy (LNG)
- 52-week range: $56.09-$113.40
- Dividend yield: 1.23%
Houston, Texas-based Cheniere Energy is a leading producer and exporter of liquefied natural gas (LNG) stateside. The company operates facilities at Sabine Pass and Corpus Christi.
At the beginning of November, the energy group reported third-quarter financials. Top line grew by 119% year-over-year (YOY) to $3.2 billion. Despite the top line and adjusted EBITDA growth of more than 100% YOY, the company’s bottom line remained in the red.
In the Q3 2020 period, Cheniere Energy had incurred a $463 million loss. In Q3 2021, the net loss figure further deteriorated to $1.08 billion or $4.27 loss per share. The main reason behind this was an increase in derivative losses. Distributable cash flow was approximately $390 million.
“Our 2022 guidance ranges are driven by Train 6 commencing in the first quarter and sustained higher margins available in the market. We look forward to reinforcing our reputation for operational excellence and delivering results within the guidance ranges next year,” CEO Jack Fusco said on the results.
The company raised full-year consolidated adjusted EBITDA guidance from the $4.6 billion-$4.9 billion to $4.6 billion-$5.0 billion range, while keeping the full-year distributable cash flow guidance of $1.8 billion-$2.1 billion intact. Management now anticipates consolidated adjusted EBITDA of $5.8 billion-$6.3 billion and distributable cash flow of $3.1 billion-$3.6 billion next year.
The consensus forward price-to-earnings (P/E) ratio is 10.99x, and the stock trades at 2.24x sales. So far in 2021, Cheniere Energy stock is up 75%, trading around $105. The 12-month median price target is $125.00. Interested readers could consider buying around $100.
Kinder Morgan (KMI)
- 52-week range: $13.47-$19.29
- Dividend yield: 6.64%
Headquartered in Houston, Texas, Kinder Morgan is one of the largest midstream energy firms in North America. The energy group transports, stores, processes natural gas, crude oil, and carbon dioxide.
Management reported Q3 financials on Oct. 20. Revenue grew by 31% YOY to hit $3.8 billion. Net income increased from $455 million in Q3 2020 to $495 million in the third quarter of this year. Diluted earnings per share (EPS) rose by 10% and came at 22 cents. The company ended the quarter with $102 million in cash.
Following the results, Kim Dang, KMI president, remarked, “Our financial performance during the quarter was strong, as we generated third quarter earnings per share of $0.22, a 10% increase over the 20 cents earnings per share achieved in the third quarter of 2020. At 44 cents per share, discounted cash flow (DCF) per share was down 4 cents from the third quarter of 2020, primarily due to higher sustaining capital expenditures in the third quarter of 2021 versus the third quarter of 2020. During the quarter, we generated $397 million of excess DCF above our declared dividend.”
For 2021, KMI now expects to generate net income of $1.7 billion and declare a dividend of $1.08 per share, implying a 3% increase from the 2020 declared dividends.
YTD, Kinder Morgan shares are up 15.1%, shy of $16. KMI stock trades at a forward P/E of 15.31x, and the price-to-sales (P/S) ratio stands at 2.41x. Meanwhile, the 12-month median price target is $18.75. A potential decline toward $15 would improve the margin of safety.
Natural Gas Stocks: Pioneer Natural Resources (PXD)
- 52-week range: $98.59-$196.64
- Dividend yield: 1.36%
Headquartered in Irving, Texas, Pioneer Natural Resources is an important exploration and production name with operations throughout the southern and central U.S.
According to Pioneer’s third-quarter results on Nov. 3, revenue jumped to $4.46 billion from $1.73 billion YOY. While the company incurred a $85 million net loss in the Q3 2020 period, this year, it recorded $1.04 billion in net profit. Hence diluted EPS was $4.07 for Q3 2021 vs a loss of 52 cents per share a year ago. Pioneer maintains a strong balance sheet, with unrestricted cash of $581 million.
On the metrics, CEO Scott D. Sheffield stated, “Pioneer continues to execute at a high level, delivering another strong quarter and generating record quarterly free cash flow of $1.1 billion.”
PXD stock, which is up over 55%, currently trades at 2.83x sales. And the consensus forward P/E stands at 8.64x. Meanwhile, the 12-month median price target is $222.50. As I write, PXD shares are about $177.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.