- The Ukraine war, global supply chain disruptions and inflation at a 40-year high have put a focus on natural gas players as the commodity’s price becomes even more volatile.
- Devon Energy Corporation (DVN) – Its stronghold in the Delaware basin is raking in serious cash. The stock’s undervalued with an attractive dividend yield.
- Matador Resources Company (MTDR) – An up-and-coming energy producer, Matador is generating significant value from its upstream and midstream operations.
- Chevron Corporation (CVX) – It’s not exactly a natural gas pure-play, but Chevron could be systemically supported while smoothing out its earnings with other energy exploits.
- Southwestern Energy Company (SWN) – The company’s unconventional gas extraction is a value-add, and its portfolio is underestimated.
Russia’s invasion of Ukraine continues to send tremors through the world’s energy markets, creating what the World Bank Group this week said “amounts to the largest commodity shock we’ve experienced since the 1970s.”
This comment pretty much sums things up. It’s definitely going to take time for commodity prices to normalize, which could cause severe distress in parts of the global economy. The benchmark price for U.S. natural gas has surged more than 80% since the start of the year.
However, you and I can do nothing about it apart from seeking profitable investment opportunities. Natural gas is always a good bet whenever primary goods are expensive because it’s an elastic product.
Natgas deposits need to be shipped off immediately after extraction, often causing the commodity’s price to overshoot its fair value.
One way to gain exposure to the commodity used as a energy source for heating, cooking and generating electricity is through a natural gas exchange-traded fund, such as United States 12 Month Natural Gas Fund, LP (NYSEARCA:UNL), which holds natural gas futures contracts to gain long exposure to the commodity’s price. (see chart above) UNL stock is up almost 166% in the last 12 months.
Here are four stocks to consider with natural gas prices hitting 2008 highs.
|DVN||Devon Energy Corporation||$58.07|
|MTDR||Matador Resources Company||$49.96|
|SWN||Southwestern Energy Company||$7.37|
Devon Energy Corporation (DVN)
Devon Energy (NYSE:DVN) stock has been one of the biggest winners during the past year. DVN has gained by more than 1.5 times year-over-year and currently sports a lucrative forward dividend yield of 7.09%.
The firm’s natural gas exploits in the Delaware basin in West Texas and southern New Mexico have provided it with robust year-round cash flows, which have been well accompanied by its oil revenues.
I’m bullish on Devon Energy stock as I think it’s still undervalued. Firstly, DVN stock is trading at a normalized non-GAAP price-to-earnings discount of 21.97%. And secondly, Devon’s levered free cash flow has surged by 2.39x in the past year, suggesting that its intrinsic value has skyrocketed.
Matador Resources Company (MTDR)
This is an up-and-coming stock. I rate Matador Resources (NYSE:MTDR) highly because it’s taking advantage of underappreciated energy projects with lucrative return profiles. Additionally, the company’s midstream exploits with its San Mateo joint-venture could be a key strategic move.
I see Matador turning into a valuable vertically integrated oil and gas firm with promising stock returns in the cards.
Matador recently beat its first-quarter earnings target by 25 cents per share, leaving the stock undervalued. MTDR stock is trading at a normalized non-GAAP price-to-earnings ratio discount worth 48.60%.
Furthermore, the stock holds attractive style factors, with its forward-return-on-equity standing at 99.08%. I’m definitely bullish here!
Chevron Corporation (CVX)
Recommending Chevron (NYSE:CVX) may seem like a bit of a cliche, considering it’s a well-known stock and isn’t a natural gas pure play. However, CVX stock is a “best-in-class” pick that could benefit from the systemic support being generated by natural gas space while smoothing its earnings volatility with its vertically integrated energy pipeline.
Part of its natgas strength lies in its 2020 purchase of Noble Energy which expanded Chevron’s presence in Colorado’s DJ basin and the Permian basin, and gave it assets in the eastern Mediterranean and West Africa.
Chevron stock provides investors with sumptuous total return prospects. CVX stock’s undervalued on a forward-price-to-cash-flow basis with the price multiple trading at a 23.90% normalized discount.
Moreover, Chevron’s forward dividend yield of 3.63% and its payout ratio of 65.31% provide evidence of a shareholder-driven company.
Southwestern Energy Company (SWN)
Southwestern Energy (NYSE:SWN) is an upstream to midstream pure-play. Its exploration projects span Pennsylvania, West Virginia, Ohio and Louisiana.
The company’s value-add lies within its unconventional natural gas production, seeing it extracting deposits from tight pore spaces. Southwestern recently beat its fourth-quarter earnings target by 3 cents per share, which now sees it generating approximately 25% of its market capitalization in cash.
The market clearly underappreciates this stock. To begin with, SWN stock is trading at a 1.16x discount to its sales. And additionally, the stock’s price-to-earnings ratio is at a 49.10% discount relative to its peers, conveying an excellent buying opportunity.
On the date of publication, Steve Booyens held long positions in DVN, MTDR and CVX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.