We recently published a list of 8 Most Undervalued Natural Gas Stocks To Buy According To Analysts. In this article, we are going to look at where Diamondback Energy, Inc. (NASDAQ:FANG) stands against other most undervalued natural gas stocks to buy according to analysts.
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.
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.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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.
Overall, FANG ranks 7th on our list of one of the most undervalued natural gas stocks to buy according to analysts. While we acknowledge the potential of FANG to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than FANG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.