3 Top Natural Gas Stocks to Buy Now

This past year was a downer for the natural gas market. After peaking at the end of 2016, the price of natural gas steadily declined, going from $3.30 per MMBtu in January to $2.88 by October. That slumping price kept a lid on production in the U.S., which rose just 0.6 billion cubic feet per day (BCF/D) versus 2016 to 73.4 BCF/D.

However, the industry appears poised for a much better year in 2018 when several catalysts should drive demand -- and the price of gas -- higher. According to the U.S. Energy Information Administration, domestic consumption should grow by more than 3.7 BCF/D in 2018 because of increased demand by power plants, the industrial sector, and for home heating due to the expectation for healthy economic growth and more normal weather conditions. Add to that rising exports via pipeline to Mexico and by cargo tanker from newly built liquefied natural gas export facilities, and the industry will need more supply next year. As a result, the EIA believes gas will average $3.21 per MMBtu in 2018.

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That forecast is music to the ears of natural gas producers, which could see their profit climb in 2018, likely taking their stocks with it. However, while that rising tide would lift all boats, low-cost producers would enjoy the greatest uptick, with three top-tier names standing above the crowd:

Data source: EQT Corporation, Antero Resources, and Cabot Oil & Gas. Bcfe/d=billion cubic feet equivalent per day.

The top dog

In mid-November, EQT Corporation completed its acquisition of Rice Energy, which created the largest natural gas producer in the country. However, in addition to getting bigger, this transaction will make EQT a better company. For starters, it now has the second lowest production costs in the industry, which will enable it to generate more cash flow at current prices. Also, by combining acreage in the already high-return Marcellus and Utica shale plays, EQT can drill longer wells, which will help improve the returns of its drillable inventory from 52% at $3 natural gas to 70%. Those lucrative returns should fuel hefty growth in the coming years as EQT develops its vast resource base.

While that high-return growth in an improving gas market alone makes EQT a compelling buy, there's a looming catalyst on the horizon that could ignite shares. EQT is working on a plan to maximize the value of its core production business and various midstream holdings, which include wholly owned assets as well as its interests in master limited partnerships EQT GP Holdings, EQT Midstream Partners, and Rice Midstream Partners. This process could lead the company to combine those entities into one or sell them to another MLP, with either option potentially unlocking the value of its growing midstream business. The upside potential from that decision (which should come early next year), when combined with rising natural gas prices, could fuel big gains for EQT investors.

The biggest slice of the best pie

Antero Resources might not be the largest natural gas producer in the country, but it has the most concentrated acreage position in the core of the Marcellus and Utica shale plays. In fact, according to the company's analysis, it holds 44% of the remaining undrilled inventory in the most gas-rich spots of those shale plays. Because of that prime position, the average well it drills should deliver a more than 55% rate of return at $3 natural gas, with additional upside if gas prices rise.

Those lucrative returns should provide the company with the financial resources to increase production by a 20% compound annual production growth rate through 2020. That high-return growth should drive Antero's stock higher even if gas prices don't budge while fueling accelerating returns for investors if prices rise.

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The low-cost leader

Cabot Oil & Gas currently boasts the cheapest production costs in the industry because it operates in one of the lowest-cost spots in the Marcellus. So, the company can still make a decent profit when gas prices are low while earning more money when they rise. 

One of the benefits of having such low costs is that Cabot currently generates more money than it needs. Consequently, it expected to return about $150 million in cash to investors in 2017 via dividends and share buybacks even as it's on pace to boost output 9% to 11% versus last year.

Meanwhile, production and cash returns should continue increasing in the coming years even if gas prices don't budge. For 2018, Cabot expects to generate about $200 million in excess cash while growing production 15% to 20%. That ever-increasing low-cost output positions the company to produce significant free cash flow in future years. It's currently on pace to expand cash flow by a 25% compound annual growth rate through 2020, positioning the company to generate a whopping $2.5 billion in excess cash over the next three years at just a $2.50 gas price, with significantly more upside at the current EIA forecast. That growing stream of cash flow could fuel impressive returns for investors in the coming years.

Positioned to excel

EQT, Antero Resources, and Cabot Oil & Gas all have one thing in common: Each controls a prime position in the best spots of the lowest-cost shale gas plays in the country. All three therefore produce significant volumes of low-cost gas, which provides them with plenty of cash flow to drill additional high-return wells across their vast acreage positions. All three can thus thrive even if the price of natural gas declines.

That said, considering the current forecast for natural gas, it looks like prices could rise in 2018, which would enable this trio to make even more money. That lower-risk upside to an improving market is what makes them the best natural gas stocks to consider buying right now.