What happened
Wednesday was yet another strong day for oil and gas stocks, but shares of natural gas companies stood out, with many soaring by double-digit percentages. Here are some of the top-performing natural gas stocks of the day, and how much they rallied at their highest points in trading Wednesday:
- Range Resources (RRC 0.17%): Up 13.5%
- Southwestern Energy (SWN 0.14%): Up 9.7%
- NextDecade (NEXT -0.83%): Up 11.9%
With Wednesday's move, each of these energy stocks are now less than 5% away from their 52-week highs.
So what
Range Resources is a Texas-based natural gas exploration and production company with major operations in the Marcellus shale in Pennsylvania. The company also produces natural gas liquids and crude oil, but almost 70% of its production is natural gas. Therefore, the price of natural gas is the biggest and most important factor that affects Range Resources' profitability and cash flow.
Southwestern Energy has a similar business profile as Range Resources, although it also provides oilfield services and has operations in the Marcellus shale, as well as Louisiana and Ohio, among others. Natural gas, though, is Southwestern Energy's bread and butter.
NextDecade is a liquified natural gas (LNG) pure play. The company, though, is still developing LNG liquefaction and export projects and is yet to generate any revenue.
The common link between these companies must be clear by now -- natural gas, and that also pretty much sums up why these stocks skyrocketed Wednesday.
Image source: Getty Images.
The thing is, natural gas prices in the U.S. hit $9 per million British thermal units (MMBtu) Wednesday morning, its highest level since 2008.
U.S. natural gas prices have now rallied more than 130% so far this year, as per data from Oilprice.com. This has been driven primarily by surging demand for LNG from Europe as the region mulls banning gas imports from Russia in the wake of the Russia-Ukraine war. Nearly 40% of the European Union's gas comes from Russia. LNG is easier to transport, and Europe is already importing record amounts of LNG, including from the U.S.
The surge in LNG exports from the U.S., combined with warm weather and high demand for electricity, is driving prices of natural gas higher and higher.
It's a win-win for companies like Range Resources and Southwestern Energy, which received prices for most of their product based on spot natural gas prices. And with demand and prices of LNG booming, investors are betting on a speculative stock like NextDecade, which may not be able to start its LNG terminal in southern Texas and generate first revenue before at least the next four years.
Now what
While it's not hard to see why investors pumped money into stocks like Range Resources and Southwestern Energy, it might be worth noting that these companies don't sell all their product at spot prices and instead use hedging to lock in prices for part production to limit losses from fluctuating commodity prices. That also means higher natural gas prices may not necessarily translate into higher profits, as these companies also have to bear losses on hedging if commodity prices move in the opposite direction.
In its first quarter, for example, Range Resources' average realized price jumped 72% year over year, which pushed its revenue higher by 71%. The company still suffered a net loss of $456.8 million, versus a profit of $27.2 million in Q1 2021 because of losses on hedging.
Likewise, Southwestern Energy reported a net loss of $2.7 billion in its first quarter, thanks to mark-to-market losses on hedging instruments.
That said, energy investors should ignore the noise and focus more on cash flow than net income and how the companies are using incremental cash. Paring debt and paying out dividends are often top of the list. As long as Range Resources and Southwestern Energy do that, their shares could continue to rise, especially if natural gas prices rally even higher.
