According to a report by McKinsey published on November 5, North America’s power and natural gas markets are undergoing a significant transformation. The global trading value for these commodities has surged to nearly $33 billion in 2023, a 50% increase from the previous year. This growth is driven by several key trends that are reshaping the market landscape and creating new opportunities and challenges for both new and established players. The North American power and gas trading value pool has tripled since 2018, reaching an estimated $10 billion of EBIT in 2023, which represents approximately 30% of the global total. The report expects these value pools to continue their upward trajectory in the medium to long term, despite a potential pullback in 2024–25 due to higher gas storage levels following a milder-than-normal winter.
Read Also: 10 Oil Stocks with Biggest Upside Potential According to Analysts and 7 Best Emerging Markets Stocks To Buy Now.
Global Natural Gas Prices Surge as Cold Weather Boosts Demand
On December 3, Reuters reported that natural gas prices in Asia, Europe, and North America have surged by 30% to 50% so far in 2024, and are expected to continue climbing over the coming months. The forecast for colder weather is expected to drive higher heating demand in key consumer regions, further boosting gas prices. This trend is anticipated to keep gas market sentiment bullish until the winter season ends, with prices likely to remain high well into 2025. The rapid restocking of declining gas inventories in Europe and Asia is also expected to spur strong gas demand, even if temperatures moderate. This will ensure that gas prices have little room to decline. The high and rising gas prices are expected to increase power costs across key global markets, potentially hampering economic growth in China, Europe, and other regions, and raising concerns about inflation.
Colder-than-average temperatures are forecast for major gas-consuming areas, including China, Japan, and mainland Europe. For instance, Seoul, South Korea, is expected to see average December temperatures of around -2.17°C, compared to a long-term average of -0.7°C. Similar below-normal temperatures are predicted for Shanghai, Tokyo, and Hong Kong, which will increase the demand for heating and accelerate the consumption of natural gas and coal. In Europe, gas inventories have already seen a significant decline. Between October 1 and the end of November, cumulative gas inventories in Germany, the Netherlands, Belgium, and France fell by 11%, compared to relatively flat inventories in 2023 and a 3.5% increase in 2022. This rapid drawdown, coupled with the need to rebuild stocks, will put additional pressure on gas prices. In the United States, while natural gas inventories are currently the highest in over five years, they are on the brink of the traditional draw-down period, which typically sees a 9% reduction in stockpiles over the final five weeks of the year. This will further tighten gas supplies and support market sentiment.
The confluence of regulatory changes, market dynamics, and weather conditions is reshaping the global natural gas and power markets, presenting both risks and opportunities for investors and industry players. With that in context, let’s take a look at the 8 most undervalued natural gas stocks to buy according to analysts.
A large natural gas pipeline snaking through a rural landscape.
Our Methodology
To compile our list of the 8 most undervalued natural gas stocks to buy according to analysts, we used Finviz and Yahoo stock screeners to find the 25 largest gas companies trading below the forward P/E ratio of 15 as of December 9. We then sourced the analysts’ average price targets and picked the 8 stocks that had the highest upside potential, as of the same date. The list is sorted in ascending order of analysts’ average upside potential.
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8 Most Undervalued Natural Gas Stocks To Buy According To Analysts
8. ConocoPhillips (NYSE:COP)
Upside Potential: 29.54%
Forward P/E Ratio as of December 9: 11.24
Number of Hedge Fund Investors: 66
Stock Price as of December 9: $103.22
ConocoPhillips (NYSE:COP) is an independent global exploration and production company based in Houston, Texas. The company is involved in the exploration, production, transportation, and marketing of crude oil, bitumen, natural gas, natural gas liquids, and liquefied natural gas. As of December 31, 2023, the company’s operations and activities spanned 13 countries worldwide.
ConocoPhillips (NYSE:COP) is taking several strategic steps to grow its gas business, both domestically and internationally. The company is leveraging the Matterhorn pipeline in the Permian Basin to transport gas to the Katy area near Houston, Texas, where the company aims to achieve higher gas prices. This pipeline is expected to increase capacity to 2.5 Bcf with the addition of compression in 2025. Internationally, ConocoPhillips (NYSE:COP) is expanding its presence in the LNG market to capitalize on growing global demand. The company has executed three agreements during Q3, representing about 1.8 MTPA of capacity, which aims to support the expected increase in gas supply to Europe. These agreements will allow ConocoPhillips (NYSE:COP) to place volumes more efficiently into multiple European markets and enhance its ability to capture premium prices.
Additionally, ConocoPhillips (NYSE:COP) is focused on being a full value chain player in the LNG market, investing in liquefaction, shipping, and regasification capabilities. This comprehensive approach is designed to ensure long-term access to premium gas markets in Europe and Asia, aligning with the company’s bullish outlook on LNG demand growth over the next decade and beyond. Furthermore, ConocoPhillips (NYSE:COP) is actively optimizing its portfolio to enhance the overall competitiveness of its gas assets.
7. Diamondback Energy, Inc. (NASDAQ:FANG)
Upside Potential: 29.97%
Forward P/E Ratio as of December 9: 11.56
Number of Hedge Fund Investors: 49
Stock Price as of December 9: $166.83
Diamondback Energy, Inc. (NASDAQ:FANG) is an independent oil and natural gas company in Midland, Texas that focuses on unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas. The company employs advanced technologies and efficient drilling practices to enhance natural gas recovery while maintaining a low-cost structure.
Diamondback Energy, Inc. (NASDAQ:FANG) is focusing on infrastructure and transportation solutions to get its gas to higher-value markets. The company has secured significant capacity on key pipelines, such as Whistler and Matterhorn, with about 250 million cubic feet of gas per day of space. This ensures that a substantial portion of its gas production can be transported to markets where it can fetch better prices. Additionally, Diamondback Energy, Inc. (NASDAQ:FANG) has a 10% stake in the upcoming Blackcomb pipeline, which will transport gas from the Permian Basin to South Texas and is expected to come online in a few years.
Diamondback Energy, Inc. (NASDAQ:FANG) is also exploring innovative ways to add value to its gas stream. One such initiative is the development of power generation facilities using its natural gas resources. By converting natural gas into electricity, Diamondback Energy, Inc. (NASDAQ:FANG) aims to capture higher margins and insulate its business from the volatility of gas prices. The company is in discussions with data center operators and other potential partners to develop power solutions that can benefit from the low-cost gas in the Permian Basin.
Diamondback Energy, Inc. (NASDAQ:FANG) is also investing in Verde Clean Fuels, which focuses on converting natural gas into low-carbon fuels. This investment aligns with the growing trend towards sustainable and cleaner energy solutions and provides Diamondback Energy, Inc. (NASDAQ:FANG) with another avenue to monetize its gas resources.
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