Global demand for natural gas is expected to grow at a healthy pace in the decades ahead. According to a forecast by oil and gas giant BP, natural gas demand will expand at a 1.7% average annual rate through 2040. That forecast implies a nearly 50% increase in demand from 2018's level.

This outlook suggests that natural gas-related companies have a bright future, since they supply the world with this cleaner-burning fossil fuel. While the biggest natural gas producers in the world will surely benefit, they aren't the only options for those considering an investment in natural gas stocks. Other excellent opportunities are smaller, low-cost upstream oil and gas producers and midstream companies like pipeline operators or liquefied natural gas (LNG) producers.

This natural gas stock buying guide will walk investors through the top long-term opportunities across the entire natural gas sector. It will highlight not only the top investment trends in the industry but also the companies best positioned to profit from these opportunities.

A natural gas wellhead in the middle of a field.

Image source: Getty Images.

The top natural gas stocks to buy

Natural gas is becoming a global market, much like oil. That's due to the rapid rise in demand from places like China. That country alone will account for 40% of global demand growth through 2024, according to the International Energy Agency. While China is a significant gas producer, the country can't meet its demand internally. That's leading it to turn to LNG.

Meanwhile, the U.S. will fuel a majority of the growth in global supplies in the coming years. By 2025, it will produce a quarter of all the world's gas and account for more than half of the growth in supply. That trend will be a boon not only for U.S. gas producers but also for companies building pipelines as well as LNG infrastructure.

Those factors suggest that natural gas has a bright future -- assuming, of course, that the pace of renewable energy development doesn't accelerate if global governments get serious about battling climate change. However, even though natural gas demand appears as if it will remain robust in the coming years, that doesn't mean its price will head much higher. So investors shouldn't bank on improving gas prices to drive their investment thesis.

Given that backdrop, the best opportunities for investors are companies that either produce natural gas from America's lowest-cost regions or operate and build the infrastructure to transport that gas to global markets via LNG export terminals. Those companies should be relatively agnostic to the price of natural gas. The following five natural gas-focused companies stand out as being the best positioned to capture these opportunities:

Top Natural Gas Stocks to Buy

Natural Gas Growth Driver

Cheniere Energy (NYSEMKT:LNG)

Liquefied natural gas along the U.S. Gulf Coast


The largest natural gas producer in the U.S.

Kinder Morgan (NYSE:KMI)

Natural gas infrastructure

Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B)

Global gas production and LNG

Williams Companies (NYSE:WMB)

Natural gas pipelines

Data source: Company investor presentations.

Here's a closer look at why these natural gas stocks appear to be so poised to deliver strong returns for investors over the next several years. One thing that will stand out about most of these companies is that they have lower risk profiles. That enables them to generate lots of cash that they typically pay out in above-average dividends, making these natural gas stocks ideal options for income-seeking investors.

A natural gas well with pipelines at sunset.

Image source: Getty Images.

Cheniere Energy: An emerging LNG leader

Natural gas will play a crucial role in meeting global energy demand in the decades ahead, since it produces 45% to 55% fewer greenhouse gas emissions than coal. Based on that prediction, analysts expect the global LNG market to grow by a 4% annual rate through 2035. That rapid increase in LNG demand is driving the need for more export terminals, especially in places like the gas-rich U.S.

One of the leaders in building and operating these facilities is Cheniere Energy. It became the first company to ship LNG from the lower 48 states when it commissioned its Sabine Pass terminal in Louisiana in 2016. The company also built an LNG export terminal in Corpus Christi, Texas, which started operations in 2018. As production from those facilities ramps up, they'll make the company the second-largest global LNG producer by 2020.

Cheniere Energy has a differentiated business model. The company typically liquefies natural gas for customers at these facilities under long-term, fixed-fee contracts. Most large-scale oil and gas companies, on the other hand, operate LNG facilities so that they can sell the natural gas they produce to global buyers. By focusing on making LNG for a fee, Cheniere's business model limits its direct exposure to commodity price volatility. That approach enables it to generate very predictable cash flow.

This model means the company is on track to produce an absolute gusher of free cash flow in the coming years. Cheniere estimates that it will generate $9.1 billion in free cash flow from the middle of 2019 through the middle of 2024. The company can use that money to pay down debt, buy back stock, pay a dividend, and invest in new LNG expansion projects.

One major project Cheniere has under development is the third stage of its Corpus Christi LNG facility. The company aims to approve construction of that project in 2020, which would put it on track to reach full production by 2025. That time frame lines up very well with the needs of the LNG market, which requires new supplies to come online by the mid-2020s to meet expected demand growth.

With the LNG market growing at a healthy pace, Cheniere Energy is set to benefit due to its large-scale operations and growth opportunities. Add in its lower-risk business model, and the company is an excellent natural gas stock to buy for the long term.

EQT: North America's biggest natural gas producer

The U.S. is on track to grow its natural gas output more than 40% by 2030, or by an additional 38 billion cubic feet per day (Bcf/d). One of the main drivers of that growth will be the gas-rich Marcellus and Utica Shale plays. According to analysts at energy industry consultancy Wood Mackenzie, those two regions will grow their output by 51% over that time frame, adding 14 Bcf/d to their total.

That forecast plays right to the strengths of EQT, which became North America's top natural gas producer in 2017, when it acquired Rice Energy. That's because the company holds a leading position in the core of those two regions. As a result, it controls the largest and lowest-cost resource base in the country. In EQT's view, it has enough drillable inventory to continue growing its production at a healthy clip for 15 to 20 years.

Thanks to its strategic and large-scale position, EQT had the lowest lease operating costs, sales, general and administrative expenses, and drilling and completion costs in its peer group during 2019. That cost leadership enables EQT to make more money on its production than rival drillers. EQT is on track to generate at least $3 billion in free cash flow through 2023, assuming no improvement in gas prices from 2018's level. The company has several options for that money. For example, it could pay off some of its debt to enhance its already-healthy investment-grade-rated balance sheet. In addition to that, it could reward shareholders through a share repurchase program or dividend.

On top of its industry-leading upstream production business, EQT also holds a meaningful investment in the midstream industry through its interest in Equitrans Midstream. The midstream company operates a premier business in the Appalachian Basin, including a large-scale gathering pipeline business as well as stakes in longer-haul pipelines. Its system is crucial to connecting gas wells in the Marcellus and Utica shale plays to market centers. Further, it has significant growth potential because it is building new infrastructure to support the region's growth. In 2019, Equitrans had $3.7 billion of pipeline projects under construction that set it up to grow earnings by 30% in the coming years.

EQT is the largest, lowest-cost natural gas producer in America. It's well positioned to cash in on rising demand for natural gas and on track to produce significant free cash flow even if prices don't improve. That will give it the money to further enhance shareholder value. Meanwhile, it also holds a stake in a leading natural gas midstream company, which provides further upside. That combination of low-cost growth and upside makes EQT one of the most compelling natural gas stocks to buy with the long term in mind.

Kinder Morgan: North America's gas infrastructure leader

The North American energy market needs to invest $23 billion per year on building new natural gas infrastructure through 2035 to support the continent's growth. The industry will have to construct more gathering and transmission pipelines, processing facilities, and LNG export terminals.

While the natural gas sector needs to build new midstream infrastructure across the continent, a large portion will be in Louisiana and Texas. That's because more than half of the increase in supply and 70% of demand growth between 2019 and 2030 will come from those two states.

On the supply side, gas production in the Permian Basin and Eagle Ford Shale of Texas and Louisiana's Haynesville Shale is on track to skyrocket in the coming years. Output in the Permian is set to surge 157% from 2019 through 2030, followed by a 108% jump in the Haynesville and a 66% increase out of the Eagle Ford.

One of the biggest beneficiaries of the need for new gas infrastructure will be Kinder Morgan. The energy infrastructure company is the leader in natural gas, moving 40% of all the gas consumed in the U.S. each year. While it operates an extensive gas pipeline network across the country, it has a leading position in Texas and Louisiana. That strategic footprint has it perfectly aligned to capture new growth opportunities to move rapidly rising supplies to fast-growing demand centers.

Kinder Morgan had $4.4 billion of gas infrastructure projects under construction in mid-2019, including two long-haul pipelines from the Permian Basin to the Gulf Coast. Meanwhile, the company anticipated that it could secure $2 billion to $3 billion of additional expansion opportunities per year, mainly focused on gas infrastructure.

That sets the company up to continue growing its free cash flow, which was on track to top $5 billion in 2019. With about half of that money going to pay its high-yield dividend, Kinder Morgan has plenty of funds remaining to invest in more expansion projects and buy back stock. That combination of growth and income should enable the company to generate strong total returns for its investors in the coming years.

An LNG tanker leaving a terminal.

Image source: Getty Images.

Royal Dutch Shell: The global natural gas giant

Shell is a behemoth in the natural gas industry. It was the second-largest natural gas producer in the world in 2018 behind Russia's Gazprom. That output came from a diversified portfolio of sources, including conventional oil and gas fields, deepwater regions, and shale wells. While Australia is its biggest gas-producing region, Shell is a major producer in Norway, Malaysia, the U.S., and Canada.

However, what sets it apart from most others in the industry is its large-scale integrated gas operations. Shell produces natural gas that it liquefies, markets to customers, and then delivers via gas-carrying ships. In addition, it buys LNG produced by others that it sells to customers at premium prices. The company's marketing operations enable it to make more money, since it can take advantage of dislocations in the market by shipping LNG to higher-priced markets.

While Shell is already one of the largest natural gas companies in the world -- and the top LNG seller in 2018 -- it sees no shortage of growth opportunities. The company estimates that it can approve more than 25 major upstream oil and gas projects and another 10 focused on integrated gas between 2019 and 2025. Among its growth opportunities are a large-scale LNG export facility along the U.S. Gulf Coast and drilling more shale wells in the Marcellus, Haynesville, and Permian Basin. Those expansion projects will increase Shell's dominance in the natural gas market by growing its production and ability to market LNG.

Shell's natural gas-focused growth has it on track to generate an enormous amount of cash in the coming years. In the company's view, it can produce $35 billion of free cash flow per year from 2021 through 2025. That's after investing an average of $30 billion annually on sustaining and growing its business. This massive supply of excess cash could allow the company to return an astounding $125 billion to its investors over that time frame through dividends and share buybacks. Those shareholder returns, when added to Shell's growth potential and high-yielding dividends, position the company to produce strong total returns for its investors in the coming years.

Williams Companies: Strategically positioned for Northeast gas growth

Williams Companies operates one of the largest natural gas pipeline businesses in the U.S., handling 30% of the country's gas volumes. Because of that, the company is well positioned to benefit from the need for new natural gas infrastructure. Two assets in particular stand out as major growth drivers for the company.

First, Williams has a large natural gas gathering and processing footprint in the Northeast that supports producers in the Marcellus and Utica shale regions. Those operations enable drillers to transport their liquids-rich natural gas to processing plants that separate the dry natural gas from natural gas liquids (NGLs). Williams is then able to move that gas to the country's interstate system.

The company's strategic footprint in the Northeast has set it up to grow in the coming years as it supports drillers. In Williams' view, the volume of natural gas it gathers from wells should increase at a 10% to 15% compound annual rate from 2018 through at least 2021.

The other highly attractive asset owned by Williams is the Transco pipeline, which is the largest interstate gas pipeline by volume in the country. The more than 1,800-mile system moves natural gas between southern Texas and New York City. Williams had nearly doubled Transco's capacity between 2008 and 2018, getting it up to 16.7 Bcf/d. It's aiming to further boost capacity to 18.9 Bcf/d by 2022.

Two factors will drive this growth. First, Williams will need to continue expanding the system to support rising supplies in the Marcellus and Utica, where analysts expect gas output to surge more than 50% by 2030. The company will also benefit from demand growth from places like the power and industrial sectors as well as LNG. Overall, natural gas demand in the U.S. is on pace to expand at a 4.9% annual rate from 2018 through 2021.

Williams Companies' natural gas assets have the company on track to generate healthy growth over the next several years. In the company's view, it can grow its earnings by a 5% to 7% annual rate after 2019. That should enable the pipeline company to continue increasing its high-yielding dividend. That growing income stream potentially sets Williams up to produce double-digit total annual returns in the coming years.

What makes the best natural gas stocks stand out

The top natural gas stocks to buy stand out for two reasons: They're leaders in their segment of the market, and they have visible growth prospects. Based on those factors, they should be able to increase their cash flow at an above-average rate. That enhances their ability to create value for shareholders through a growing dividend and a rising stock price. That combination of growth and income should enable these natural gas stocks to produce attractive total returns for investors over the long term.