Many tend to be overly focused on oil exposure when energy prices are on the rise. While I don’t dispute the narrative, I’d like to add that natural gas exposure could in fact be a more lucrative short-term play.
The reason for this is primarily due to the commodity’s excess price elasticity, which occurs because its deposits don’t get stored in reserves for as long as crude oil. It’s thus why you’ll often see natural gas prices overshoot oil prices.
Henry Hub is the phrase used for a unit of natural gas. Old Henry Hub has now exceeded the $5 handle as fears of short supply stack up amid inactivity in the Black Sea.
The recent price surge (9% the past week) adds up to a cumulative annual increase of 85%, signaling potential strength in upstream natural gas stocks.
The natural gas stocks that I believe have the best all-around characteristics are Canadian Natural Resources (CNQ), Devon Energy (DVN), and Pioneer Natural Resources (PXD). Needless to say, I’m bullish on all of them.
Canadian Natural Resources
This energy powerhouse has a diversified portfolio of fossil deposits, with natural gas making up 26% of its portfolio. During the full year of 2021, Canadian Natural posted LNG production of 1,695 MMcf/d, a 15% increase over 2020.
Its increased production assisted the firm to a fourth-quarter revenue beat of $484.66 million, which resulted in a quarterly dividend bump of C$0.16 per share, its largest increase in history.
The outlook for 2022 remains bright for Canadian Natural, and that’s not just because of the systemic support from rising energy prices, but also its aggressive re-investment rate and its emphasis on shareholder value.
To elaborate, Canadian Natural is planning on deploying CapEx of 6% in 2022 to expand on its operations, which could contribute to cost-cutting benefits. In addition, the firm plans to reward shareholders with a share buyback amounting to 50% of its generated cash flows.
Turning to Wall Street, CNQ has a Moderate Buy consensus rating, based on 12 Buys and eight Holds assigned in the past three months.
The average CNQ price target of $57.57 actually implies 3.4% downside potential. However, this could soon change as more analyst ratings get captured during the next month.
Devon Energy
Devon Energy has been one of the renowned success stories during the past year, with its stock surging by more than 165%. The American oil and gas giant’s exploits in the famous Texas Permian focus on low-cost exploits in the Delaware Basin and Eagle-Ford.
Devon Energy has decided to scale down on exploration for the foreseeable future and re-arrange its capital structure.
Why is its strategy appealing to shareholders? Devon has already established itself as a cash cow, and it recently outlined its intention of being more shareholder-driven.
In other words, the firm has decided to de-risk its operational leverage to be more appealing to shareholders with its improved shareholder compensation mix.
This stock has a forward dividend yield of 6.7% and is undervalued by 17.8% relative to its five-year average price-to-earnings ratio. I believe we’ll see some serious momentum from DVN stock in the coming year, especially considering the systemic support from Russia-Ukraine sanctions.
Wall Street analysts think the stock is a Moderate Buy based on 13 Buy and five Hold ratings assigned during the past three months.
The average Devon price target of $59.47 implies 3.6% upside potential.
Pioneer Natural Resources
In the words of the great Warren Buffet: “cash is king.” Pioneer is a lucrative option at this stage because of its monstrous cash balance.
In 2021, the firm produced free cash flows of $3.2 billion, meaning the stock is undervalued by 13% on a cash flow basis and 56.72% on a net earnings basis.
In 2021 Pioneer produced 348-363 MBbls of natural per day, resulting in a 67% increase in annual segment revenue. The firm plans to re-invest $3.5 billion in 2022 in 2022 to expand its operations in the Permian Basin; this comes after its year-over-year CapEx growth of 97.82% in 2021 and could lead to a surge in topline earnings.
Let’s have a peek at Wall Street’s take. Pioneer has a Moderate Buy consensus rating, based on twelve Buys and five Holds assigned in the past three months.
The average Pioneer price target of $246.24 implies 8.1% upside potential.
Concluding Thoughts
Natural gas exposure remains a short- to-medium-term play; however, it could yield lucrative results if you manage your stock adequately.
I’m in firm favor of the stocks I mentioned in the body of the article due to their inherent traits that combine low-cost exposure, shareholder value, and well-balanced re-investment policies to fully exploit the market.
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