In this article, we shared the 11 best natural gas stocks to buy now. You can skip our analysis of the natural gas industry and its growth catalysts and go to 5 Best Natural Gas To Buy Now.
As the energy markets continue to recover following the availability of coronavirus vaccines and a decline in new COVID-19 cases, energy investors are hoping that natural gas stocks will rebound in 2021 and beyond. Natural gas stocks are linked to various volatile factors like weather, demand and global markets situation. While the demand of natural gas is expected to remain soft in the short term, the opportunity for long-term investors is huge in the industry. According to a report by EIA, total consumption of natural gas in 2021 is expected to be about 81.7 billion cubic feet per day (Bcf/d) , a decline of over 1% from 2020. The decline is mainly driven by higher gas prices. The agency also estimates that industrial consumption in the year will average 23.0 Bcf/d in 2021, up 0.4 Bcf/d from last year, thanks to the recovery in the economic activity.
Strong Recovery Expected
The natural gas sector is going through rapid technological changes. Advancements in horizontal drilling and hydraulic fracturing boosted the natural gas production after the shale revolution in the U.S.
According to a 2014 report by the American Petroleum Institute, technically recoverable natural gas resources in the country are 2,431 Tcf, compared to 1,594 Tcf in 2005. The immense quantity of natural gas reserves made the U.S. an exporter of this valuable commodity. In 2017, the country exported more natural gas than it imported. Since 2017, the country’s natural gas exports have doubled every year. They, however, slowed after the coronavirus-induced decline in the economic activity. However, as economic activity rebounds in China and Asia – which account for more than half of the gas demand – U.S. natural gas companies are bound to thrive. Another report by IEA estimates that North American gas production accounted for about 28% of total gas supply in 2019, while the agency estimates a 1.5% incremental growth in those numbers annually through 2025.
The China Effect on Natural Gas
According to a report by the International Energy Agency, the Asia Pacific region will account for almost 60% of the total consumption increase through 2024. China will account for about 40% of the global gas demand growth over the next five years. The Chinese government implemented “coal-to-gas” policy to combat air pollution in the country. These transformations along with a booming industrial cycle in the country would increase gas consumption.
AI to Assist in Natural Gas Operations
The natural gas sector is one of the beneficiaries of the advancement in artificial intelligence and technology. The National Association of Regulatory Utility Commissioners said in a report that AI would bring various changes in the natural gas sector, including automatic detection of gas leakage and boosting efficiency. The Southwest Research Institute developed SLED (Smart Leak Detection), an algorithm that identifies methane leaks by using autonomous sensing solutions through infrared and sensors. The SLED project was backed by the National Energy Technology Laboratory (NETL).
London-based National Grid plc (LON: NG) and and Indiana-based NiSource Inc. (NYSE: NI) are already benefitting from AI’s predictive analytics to reduce third-party excavation damages that could lead to methane leak.
Like the natural gas industry, global financial markets are consistently in flux. Even the smart money is having a hard time. Hedge funds’ reputation has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. Between March 2017 and February 5th 2021 our monthly newsletter’s stock picks returned 187.5%, vs. 75.8% for the SPY. Our stock picks outperformed the market by more than 111 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context and industry outlook in mind, let’s start our list of the 11 best natural gas stocks to buy now.
11. Antero Resource Corporation (NYSE: AR)
No of HFs: 31
Total Value of HF Holdings: $285 Million
We start our list of the 11 best natural gas stocks to buy now with, Antero Resource Corporation. The company has been around since 2002 when it was founded by Paul M. Rady and Glen C. Waren Jr. During the fourth quarter of 2020, the company reported a net income of $70 million.
At the end of the fourth quarter, 31 hedge funds in Insider Monkey’s database of 887 funds held stakes in Antero Resource Corporation, compared to 21 in the third quarter. FPR Partners is the biggest stakeholder in the company, with 17.7 million shares, worth $96 million.
10. Hess Corporation (NYSE: HES)
No of HFs: 33
Total Value of HF Holdings: $366 Million
Hess Corporation is an independent energy corporation that is involved in the production of crude oil and natural gas. For twelve consecutive years, the company was identified by CDP as a leader in clean energy sector. The company offers a dividend yield of 1.45%.
According to our database, the number of AR’s long hedge funds positions decreased at the end of the fourth quarter of 2020. There were 33 hedge funds that hold positions in Hess Corporation, compared to 35 funds in the third quarter. One of the biggest hedge funds having stakes for HES is Ken Fisher’s Fisher Asset Management, which had 3.1 million shares, worth $164 million.
Massif Capital mentioned HES in its Q2 2020 investor letter and said the following about the stock:
“We took a short position in Hess (HES) during the first quarter due to what we believed to be a weakness in their assertion that the Bakken would serve as a cash engine, along with their Gulf of Mexico assets, to pay for the development of their offshore Guyana fields. Our analysis suggested that not only was their fracking in the Bakken unprofitable but that it was unlikely ever to be so. The market very quickly told us that although we might be right in our analysis of the fundamentals, it did not care. We suspect that much of this has to do with the fact that Hess had hedged nearly 100% of their production in 2020 during the relatively high priced 2019 period, but we cannot be certain. Since we closed out the position, the stock has rallied a further 45%. We take this as directional evidence (perhaps) of a good decision. Hess contributed -0.19% to the portfolio during the quarter.
We have mostly avoided shorting oil companies in the last few years. The opportunity is appealing but extremely tricky to evaluate. Hess remains an interesting short. We have little confidence in the long-term viability of operations in the Bakken, and Hess remains a large player. Yet as the firm moves further along in their development and monetization of assets in Guyana, the weight of the Bakkens failure to play a meaningful role in producing positive free cash flow becomes increasingly difficult to determine by looking at the financials and perhaps less significant to the market. One thing that seems increasingly true of the environment we are investing in is that bad capital allocation by management teams can be easily forgiven if there is plenty of liquidity, even if access to liquid capital imperils long-term solvency.”
9. Diamondback Energy, Inc. (NASDAQ: FANG)
No of HFs: 34
Total Value of HF Holdings: $412 Million
Diamondback Energy, Inc. ranks 9th on our list of 11 best natural gas stocks to buy now. The company was founded in 2007 and is engaged in the exploration of hydrocarbons and natural gas. The company recently completed its acquisition of 32,500 net acres in the Northern Midland Basin from Guidon Operating LLC. During the fourth quarter of 2020, the company reported cash flow from operating activities of $403 million.
With $158 million invested in Diamondbank Energy, Inc, Natixis Global Asset Management’s Harris Associated owns 3.2 million shares at the end of December. Our database shows that 34 hedge funds held stakes in FANG as of the end of the fourth quarter, versus 23 funds in the third quarter. In Miller Value Partners Q4 2020 investor letter, they mentioned that FANG is a low-cost shale producer that screened well on a number of metrics.
“We also bought Diamondback Energy. For the first time in decades, we find energy to be quite attractive. Companies are finally focusing on cash flow and returns. Diamondback is a low-cost shale producer that screened well on a number of metrics we pay attention to (dividend yield, free cash flow yield, discounted cash flow, and insider buying). They recently added ROIC to their management incentive compensation. They plan to continue to pay down debt and maintain the dividend. The company is obviously levered to increasing oil prices.”
8. Cimarex Energy Co. (NYSE: XEC)
No of HFs: 34
Total Value of HF Holdings: $510 Million
Cimarex Energy Co. is based in Colorado and operates in the oil and gas sector. The company is focused on the exploration of hydrocarbons, specifically, shale oil and gas drilling. On February 18, the company announced a quarterly cash dividend on its common stock of $0.27 per share, payable June 1, 2021, to stockholders as of May 14, 2021.
As of the end of the fourth quarter, there were 34 hedge funds in Insider Monkey’s database that held stakes in Cimarex Energy Co. compared to 38 funds in the third quarter. Phill Gross and Robert Atchinson’s Adage Capital Management is one of the top hedge funds having a position in XEC. The fund had 2.8 million shares, worth $106 million invested in XEC at the end of December.
Brown Advisory highlighted a few stocks in its Q2 2020 investor letter and Cimarex Energy Co. was one of them. Here is what Brown Advisory had to say about the stock:
“We eliminated our small holding in Cimarex Energy in favor of consolidating our oil-related investments by adding to existing holding Suncor Energy, which we believe is a stronger company to own with oil prices at a historic low.”
7. Apache Corporation (NASDAQ: APA)
No of HFs: 35
Total Value of HF Holdings: $371 Million
Texas-based Apache Corporation ranks 7th in our list of 11 best natural gas stocks to buy now. The company is concentrated in the development and production of natural gas, crude oil, and natural gas liquids. The company recently announced the completion of its new holding company structure. The structure makes APA the parent holding company of Apache. On February 21, 2021 the company was identified as one of the World’s Most Admired Companies by Fortune. In the fourth quarter of 2020, APA announced a net income of $10 million.
At the end of the fourth quarter, 35 hedge funds in Insider Monkey’s database of 887 funds held stakes in Apache Corporation, compared to 42 hedge funds in the third quarter. Natixis Global Asset Management’s Harris Associates is the biggest stakeholder in the company, with 14.7 million shares, worth $209 million invested at the end of December. An insider purchased 32,942 shares at $5 in April 2020. The stock is up 280% since then.
6. Pioneer Natural Resources Company (NYSE:PXD)
No of HFs: 40
Total Value of HF Holdings: $685 Million
Pioneer Natural Resources Company is one of the 11 best natural gas stocks to buy now. The company is the largest area land holder in the Cline Shale. In January 2021, PXD completed its $4.5 billion acquisition of the independent oil and gas company Parsley Energy. Currently, they offer a dividend yield of 1.43%. During the fourth quarter of 2020, the company reported a total profit of $43 million, or $0.26 per share.
According to our database, the number of Pioneer Natural Resources Company’s long hedge funds positions decreased at the end of the fourth quarter of 2020. There were 40 hedge funds that hold a position in Pioneer Natural Resources Company by the end of December, versus 42 hedge funds in the third quarter. The biggest stakeholder of the company is Phill Gross and Robert Atchinson’s Adage Capital Management, which had 1.1 million shares, worth $131 million invested in the stock at the end of December.
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Disclose. None. The article 11 Best Natural Gas Stock to Buy Now is originally published on Insider Monkey.