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Investing in Natural Gas Stocks

Updated: Sept. 14, 2021, 3:35 p.m.

Natural gas is a vital fuel source. We use it for producing power, heating our homes, and for various other residential, commercial, and industrial functions. It's the cleanest-burning fossil fuel, abundant, and cheap. These factors make natural gas a critical “bridge fuel” during the transition to carbon-free alternatives such as solar, wind and geothermal energy.

Given the unique characteristics of natural gas, demand is on track to continue growing in the coming years. The International Energy Agency sees natural gas demand rising 29% by 2040, outperforming an expected 20% increase in total energy demand. That makes it an important market for investors. Here's a closer look at how to invest in natural gas stocks.

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The natural gas industry is rapidly changing in the current economic climate. Check out the recent articles at the bottom of this page for the latest.

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The top natural gas stocks

While oil is the largest energy market, natural gas plays an important role. Several companies focus on this cleaner-burning fossil fuel. Some of the best natural gas stocks for investors to consider buying include:

Natural Gas Stock Ticker Symbol Market Cap What the Company Does
Cheniere Energy

(NYSEMKT: LNG)

$27.8 Billion One of the world's largest liquefied natural gas (LNG) exporters.
EQT Corporation

(NYSE: EQT)

$7.7 Billion The largest natural gas producer in the U.S.
Kinder Morgan

(NYSE: KMI)

$35.6 billion One of the largest natural gas infrastructure companies.

Data source: Company websites and Ycharts. Market cap data as of Sept. 8, 2021.

1. Cheniere Energy

Cheniere Energy is the largest liquefied natural gas (LNG) producer in the U.S. and the second-biggest global LNG operator. The company liquifies natural gas, allowing it to export the fuel globally via specialized LNG cargo ships. As of late 2021, Cheniere Energy owned interests in and operated two liquefaction and export facilities along the U.S. Gulf Coast:

  • Sabine Pass LNG Terminal: Located in Louisiana, this terminal has five operating LNG trains and one under construction, with anticipated completion in the first half of 2022. It will eventually have the capacity to produce 27 mtpa (million metric tons per annum) of LNG each year.
  • Corpus Christi LNG Terminal: Located in Texas, this terminal has three operating LNG trains, with the capacity to produce 13.5 mpta of LNG per year. Cheniere is also moving toward approving Corpus Christi Stage 3, which could add more than 10 mpta of additional capacity.

Cheniere sells the bulk of its LNG under long-term, fixed-rate contracts. That enables the company to generate predictable cash flow. It expects to produce a cumulative $10 billion in distributable cash flow through 2024.

The natural gas export company aims to allocate the cash flow to a quarterly dividend (which it initiated in late 2021), repurchasing shares, paying down debt, and funding Corpus Christi Stage 3. Its balanced capital allocation plan should enable Cheniere to create significant value for its shareholders in the coming years.

2. EQT

EQT Corporation is the largest natural gas producer in the U.S. The company focuses on producing gas from the Appalachian Basin, which stretches across Pennsylvania, West Virginia, and Ohio. As of late 2021, EQT owned 880,000 net acres in the core of the Marcellus Shale. It produced an average of 5.6 billion cubic feet of natural gas equivalent per day. That's 6% of the nation's total daily output. If EQT were a country, it would be the 12th-largest gas producer in the world.

EQT's size gives it scale advantages, making it one of the world's lowest-cost natural gas producers. It also has the best credit profile in its peer group, giving it access to low-cost debt and further reducing costs. These factors position EQT to generate significant free cash flow.

The company expects to produce more than $7 billion in cumulative free cash flow through 2026. While that assumes competitive natural gas pricing, the company uses hedges to help mute the impact of volatility. Meanwhile, it has upside potential if prices improve.

EQT expects to use some of its free cash flow to repay debt in the near term. However, with only $2.7 billion of debt maturing through 2026, the company will have ample excess cash to use on other shareholder-friendly activities such as dividends, share repurchases, and accretive acquisitions. EQT aims to be a consolidator in the natural gas sector. It purchased Alta Resource Development for $2.925 billion in 2021 and Chevron's (NYSE:CVX) Appalachian Basin assets for $735 million in 2020. These deals have expanded its production, scale, and free cash flow, making it the dominant gas producer in the U.S.

3. Kinder Morgan

Kinder Morgan is a leader in operating energy infrastructure in North America, controlling the nation’s largest natural gas transmission network. Toward the end of 2021, it had 70,000 miles of natural gas pipelines to go along with 700 billion cubic feet of storage capacity. It's also the largest independent transporter of refined petroleum products, independent terminal operator, and carbon dioxide transporter. Kinder Morgan's infrastructure connects every major natural gas resource play to key demand centers. It handles 40% of all the natural gas consumed and exported in the U.S. each year.

Kinder Morgan's leading natural gas infrastructure business generates very stable cash flow. Overall, 97% comes from take-or-pay contracts, other fee-based arrangements, or hedges. That allows it to produce more than $4 billion in free cash flow each year.

Kinder Morgan allocates its cash flow toward paying a high-yielding dividend, repurchasing shares, and expanding its natural gas network through capital projects and acquisitions. The company made two notable deals in 2021. It bought Stagecoach Gas Services, a pipeline and storage network in the Northeast, for $1.22 billion. It also bought Kinetrex Energy, a renewable natural gas producer, for $310 million. Kinetrex is the first transaction by Kinder Morgan’s energy transition ventures business unit, which it launched in 2021. The segment aims to identify, analyze, and pursue commercial opportunities as the energy sector transitions to lower-carbon fuel sources. Kinder Morgan's extensive natural gas infrastructure footprint makes it ideally suited to transport lower-carbon fuel sources.

Related investing topics

A quick overview of the natural gas market

Natural gas is an abundant, cleaner, low-cost, and versatile fuel -- but it has some important limitations. In its gaseous form, it must travel by pipeline. Because of that, infrastructure is essential for the natural gas industry.

Midstream energy companies must build and operate pipelines, processing plants, and storage facilities to transport gas from production basins to end markets. Meanwhile, natural gas needs to become a liquid for transportation overseas.

Infrastructure companies often make the best natural gas stocks. They're less susceptible to the energy industry's cyclical nature and pricing volatility. Most natural gas infrastructure companies generate stable cash flow by collecting fees as natural gas moves through their network, giving them a "toll booth" business model.

The secret to finding top natural gas stocks

The combination of a growing global population and high energy infrastructure costs presents a big opportunity for long-term value creation -- often in the form of dividends -- for the top natural gas stocks in the sector.

That said, we can expect a lot of turmoil in the industry in the coming years as renewable energy development accelerates. Investors should make sure they understand the risks before buying natural gas stocks.

FAQs

What are the best natural gas stocks?

If you’re thinking of buying into this industry, consider these natural gas companies to help you get started:

  1. Royal Dutch Shell
  2. Kinder Morgan
  3. Enterprise Products Partners

What is liquified natural gas?

Natural gas is an abundant resource that’s cleaner and cheaper than other fossil fuels. However, it has one major disadvantage. In its natural form, this gas must travel by pipeline, and pipelines can’t easily be built over water, making international markets hard to reach. Companies must turn natural gas into a pressurized liquid that gets loaded onto ships and carried to overseas markets.

Are natural gas stocks cyclical?

Gas prices tend to be cyclical, and in the U.S. they’re usually measured by the Henry Hub spot price: the cost of a million BTUs of natural gas at the Henry Hub on Louisiana’s Gulf Coast. This makes gas stocks somewhat resilient to oil price volatility.

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