Utilities are the classic defensive stock because as a regulated public good they operate within strict parameters for profit, return on investment, and dividends. Besides, the reasoning is that people need light and heat even in a recession. They can cut back on discretionary spending, but gas and electricity are not in that category.

But upstream energy providers are great defensive stocks, too. Although these companies don't enjoy monopolies as utilities do, people still need energy regardless of what happens with the economy.

Nowadays the base fuel that supplies energy is also an important component in the equation. The public wants less reliance on fossil fuels to combat climate change. Among fossil fuels, they want less coal and oil and more natural gas, the cheapest and cleanest among carbon fuels. Natural gas isn't clean enough for some. But until wind, sun, waves and other renewable sources can supplant natural gas, we will continue to use more of it every year for the foreseeable future.

Natural gas fracking rig in a field against a partly blue sky.

IMAGE SOURCE: GETTY IMAGES

Three natural gas stocks that have taken their lumps in recent months are poised to act as defensive stocks with above-average potential to help investors weather the next recession. These stocks cover the full gamut of gas distribution -- retail distributor New Jersey Resources (NYSE:NJR), pipeline operator Williams Companies (NYSE:WMB), and producer Cabot Oil and Gas (NYSE:COG)

1. New Jersey Resources 

New Jersey Resources is a middling gas distribution company in a sector where scale doesn't make much difference after a certain point. Its New Jersey natural gas unit ranks 31st among U.S. gas distributors, with 39 billion cubic feet equivalent residential sales volume in 2017 and $432 million revenue, according to the American Gas Association.

These aren't very exciting numbers, but New Jersey Resources is solid. It has a market cap close to $4 billion. Lest you think that's too small potatoes to hold your interest, take note that BlackRock increased its stake by 1.5%, bringing its total to 12.5 million shares worth about $620 million and representing 13.8% of New Jersey Resources' total outstanding shares. 

The company just ensured its transition and reinforced its stability by naming COO Steve Westhoven, a lifer who started as an engineer at the company in 1990, to succeed Laurence Downes as CEO as of Oct. 1. Weshoven will also become chairman of New Jersey Resources' board of directors in January.

2. Williams Companies  

Williams Companies is the leading U.S. pipeline operator and stands to benefit from investment in pipeline infrastructure. In particular, transporting the liquids-rich natural gas from the Utica and Marcellus shale formations will require expansion as production is expected to grow 50% by 2030. Overall, the company expects the volume transported to grow by a compound annual rate of between 10% and 15% at least through 2021.

Demand is fueling this expansion as natural gas use surges. Historically, natural gas for residential use has been notoriously dependent on the weather, doing well in cold winters and not so well in warmer seasons. But the switch in electricity generation from coal-fired power plants to gas-fired as a way of meeting emissions targets has created new and steady demand.

The electric power sector accounted for 35% of natural gas consumption in 2018, and natural gas was used for around 29% of the sector's primary energy consumption. Electric power accounted for 10.6 trillion cubic feet of natural gas consumption in 2018, double the 5.2 trillion in 2000 and surpassing industrial consumption for the first time. When liquid natural gas terminals currently under construction come on stream, U.S. exports of natural gas will soar from present levels. 

3. Cabot Oil and Gas  

Natural gas producers are most at the mercy of volatile energy markets, as supply and demand and oversupply take prices on a rollercoaster ride. Cabot Oil and Gas shares took a scary ride down in July shedding nearly 30% of its market cap -- and more than 40% from its 52-week high in April -- before recovering to its current levels. Although the company beat Q2 earnings estimates, its production growth was weaker than expected.

Cabot is at pains to keep its capital spending and production growth in balance with its financials. The company cut guidance on production both for this year and next as it spent money instead to acquire valuable land  to expand its footage and pave the way for future production growth.

The company has plenty of room to increase its dividend payment and is steadily buying back shares to further boost its dividend yield, which currently stands at 2.1%. Return on capital employed (ROCE)  will range from 19% to 26% this year, depending on the price of gas, in line with its 12-month trailing ROCE of 24.3%. A high ROCE is considered a measure of a company's efficiency and its ability to extract more value from every dollar of capital.

Weathering well 

New Jersey Resources weathered the Great Recession well, dipping 12% from the beginning of the recession to its nadir. This was a much better performance than that of the S&P 500, which fell more than 50% at its lowest point.  

Williams Companies and Cabot  had a rougher ride, with spikes and cliffs mostly in line with the S&P 500. However, they both quickly recovered to pre-recession prices and then rode the fracking boom to new highs. It's this growth of fracking gas production, from less than 20 billion cubic feet a day in 2007 to 65 billion cubic feet a day by the end of 2018 , along with the structural changes in the energy industry, that should ensure a smoother path for these stocks in what is likely to be a milder recession -- whenever it may come.