This may feel like an odd time to be talking about the best natural gas stocks to buy. Natural gas futures trading on the New York Mercantile Exchange’s Henry Hub just closed at a two-month low despite much of the U.S. bracing for an “Arctic blast.” European natural gas is trading at its lowest level since mid-June as supply concerns ease. On top of this, the European Union agreed to a cap on natural gas prices starting Feb. 15. Oh, and then there are fears that a global recession will hurt demand.
In other words, short-term volatility is likely to plague even the best natural gas stocks. However, the longer-term outlook for the sector is more bullish than recent headlines and trading action suggest.
For starters, Europe’s price caps still need a “qualified majority” of 15 countries representing at least 65% of Europe’s population to agree to them before they can be implemented. Furthermore, the measure, which is meant to soften the consequences of Russia’s invasion of Ukraine, may backfire. Caps require cooperation. With gas traders fearing losses, they could end their activities, resulting in supply shortages and causing prices to jump — exactly what the caps were meant to prevent.
This, along with continued disruption from Russia’s invasion of Ukraine and severe winter weather, could indeed result in more gains ahead for the best natural gas stocks listed below.
Best Natural Gas Stocks: Black Stone Minerals (BSM)
Based in Houston, Black Stone Minerals (NYSE:BSM) focuses on acquiring diverse mineral and royalty assets. So far, the unique dynamics of the post-pandemic new normal benefitted Black Stone handsomely. Since the start of the year, BSM has gained more than 57%. Currently, the company features a market capitalization of $3.4 billion.
One of Black Stone’s attractive attributes is its dividend. While the hydrocarbon space carries a reputation for generous passive income opportunities, BSM stands out. Its forward yield of 11.1% is well above the energy sector’s average yield of 4.2%. However, sustainability questions will cloud this dividend, as the payout ratio of 86% is on the high side.
Nevertheless, Black Stone represents one of the best natural gas stocks to buy because of its robust balance sheet and strong profitability metrics. Specifically, its net margin of nearly 70% ranks above almost 95% of the industry.
BSM is down 20% from its 52-week high, made in early November, offering investors an attractive entry point.
Matador Resources (MTDR)
Based in Dallas, Texas, Matador Resources (NYSE:MTDR) plies its trade in the exploration side of the hydrocarbon space. Since the start of this year, MTDR gained over 48%. However, shares have slowed down recently, falling 26% from their November high, perhaps signaling a buying opportunity for contrarian investors. At the time of writing, Matador features a market cap of $6.5 billion.
With the decline in its share price, Matador’s valuation profile has shifted for the better. Two months ago, MTDR was considered “modestly overvalued,” according to GuruFocus’ proprietary calculation. A month ago, it was rated “fairly valued,” and today, it is considered “modestly undervalued.” Using a more traditional metric, MTDR trades at 5.6 times trailing 12-month earnings, below the industry median of 8.2.
Now, onto the main reasons why MTDR ranks among the best natural gas stocks to buy. On the top line, Matador features a three-year revenue growth rate of 20.8%, beating out nearly 87% of its peers. On the bottom line, Matador has a net margin of 40.3%, well above the industry median of 4.4%. As well, the company’s Altman Z-Score of 3.7 reflects relatively low bankruptcy risk.
Best Natural Gas Stocks: Pioneer Natural Resources (PXD)
Headquartered in Irving, Texas, Pioneer Natural Resources (NYSE:PXD) specializes in hydrocarbon exploration. Year to date, PXD has gained 21%, bringing its market cap to $52.3 billion. However, shares sit 19% below their late-October high, potentially offering an opportunity for those that missed the boat earlier this year.
Let’s get the bad news out of the way first. According to GuruFocus’ proprietary calculations, Matador rates as “modestly overvalued.” PXD trades at a premium based on traditional metrics such as its forward price/earnings ratio and price/sales ratio, although they’re not too far above their respective industry medians. However, it Shiller P/E ratio of 49.4 is well above the industry median of 16.4. Still, the energy sector remains the year’s best performer, so this is not entirely unexpected.
And investors get plenty for their money. First, Pioneer has a stout and stable balance sheet with low bankruptcy risk based on its Altman Z-Score of 4.3. Second, its three-year revenue growth rate of 9.8% beats out 75% of the competition. Finally, Pioneer’s net margin of nearly 29% ranks better than 81% of its peers.
Texas Pacific Land (TPL)
Representing a publicly traded real estate operating company, Texas Pacific Land (NYSE:TPL) owns about 880,000 acres in West Texas. It happens to be one of the largest private landowners in Texas, focusing on various hydrocarbon projects. Since the start of this year, TPL has gained a staggering 87%, bringing its market cap to $19.4 billion. However, for investors looking to get into this blazing-hot stock, shares sit 10% below their mid-November high.
Gurufocus labels TPL “modestly overvalued,” warning investors they’ll pay a premium for shares. And its P/E and forward P/E ratios are among the highest in the industry. Yet, Texas Pacific stands out among the best natural gas stocks to buy for its financial strength.
Take its balance sheet, for example. With zero debt and an astronomical Altman Z-Score of 116.8, Texas Pacific is about as clear of bankruptcy risk as you can get. Further, the company features excellent growth metrics, including a three-year revenue growth rate of 14.7%, better than 82% of its peers.
Finally, Texas Pacific has a return on equity of almost 64% compared with an industry median of only 9.3%, In other words, Texas Pacific has a high-quality business and demonstrates superior capacity to convert equity financing into profits.
Best Natural Gas Stocks: Canadian Natural Resources (CNQ)
If you’re looking for a broadly balanced opportunity among the best natural gas stocks to buy, you should consider Canadian Natural Resources (NYSE:CNQ). A senior oil and natural gas firm with a market cap of $59.1 billion, CNQ shares have gained 29% since the beginning of the year. However, the stock’s 15% drop from its November high may bring out the contrarians who don’t believe recession or price caps will shift the paradigm
Notably, Canadian Natural Resources provides a forward yield of 4.7%, which is slightly higher than the sector average. Its payout ratio sits at just under 33%, making it an attractive dividend play for conservative investors.
Per GuruFocus, CNQ is “fairly valued,” featuring middling rankings for earnings multiples. However, the company enjoys a stable balance sheet. Additionally, it ranks strongly for growth and profitability. Finally, CNQ is a high-quality business with a return on equity of 31.7%, outscoring 78% of its rivals.
Overall, CNQ is one of the best natural gas stocks you’ll find.
Woodside Energy (WDS)
Based in Australia, Woodside Energy (NYSE:WDS) is an oil and gas production firm with a market cap of $45.5 billion. Since the start of 2022, shares have shot up over 50%.
As with the other stocks on this list, WDS has lost momentum recently. Shares are down more than 10% since hitting a 52-week high in November. However, this softness could offer an attractive entry point.
Per GuruFocus’ proprietary calculations, Woodside’s business is “significantly undervalued.” Against traditional metrics, it doesn’t seem particularly undervalued, though its enterprise value (EV)-to-forward EBITDA is 5.2, whereas the industry median is 6.6.
Notably, the company has a solid balance sheet. In particular, its equity-to-asset ratio is 0.6, better than over 64% of the sector. As well, its three-year revenue growth rate of 8.3% ranks better than 72% of its peers.
On the profitability side, WDS has a net margin of 31.7%, better than nearly 83% of the industry. Finally, its return on equity of 17% reflects a quality business.
Best Natural Gas Stocks: Diamondback Energy (FANG)
A hydrocarbon specialist headquartered in Midland, Texas, with a market cap of $24.2 billion, Diamondback Energy (NASDAQ:FANG) focuses on exploration. It’s involved in petroleum, natural gas and natural gas liquids, or NGLs. Since the beginning of the year, FANG has gained 23%. But shares have lost 21% since hitting a November high, which might attract discount seekers.
According to GuruFocus, FANG is a “modestly undervalued” investment. But its P/E ratio of 5.4 rates favorably below the industry median of 8.2. Where the company really attracts attention as one of the best natural gas stocks to buy, though, is its strong growth and profitability metrics.
Currently, its three-year revenue growth rate is 22.7%, beating out more than 87% of its rivals. Further, its three-year EBITDA growth rate stands at 12.5%, better than 62% of the industry. On the bottom line, Diamondback’s net margin stands at a whopping 45.5%, superior to 90% of its peers.
Finally, Diamondback enjoys a return on equity of 34.5% and a return on assets of nearly 19%, thus indicating an extremely high-quality enterprise.
On the date of publication, Josh Enomoto 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.