The onset of hotter weather have helped lift natural gas prices by more than 25% since late June, when they hit their lowest level since 1995. With the commodity being the primary U.S. power plant fuel, firms in natural gas business are set to benefit from the bump in cooling demand.
“Record heat has descended on most of the country and is expected to last for the bulk of July,” Tudor Pickering Holt & Co. analysts say. The recent spike in summer heat translates into the burning of more gas to feed higher electricity consumption for air-conditioning. According to the EIA's latest Short Term Energy Outlook, natural gas’ share of electricity generation would rise to 41% this year from 37% in 2019. Therefore, as Americans crank up their air conditioning to combat hotter-than-normal weather, companies in the natural gas industry stand to make more money.
This should also significantly reduce the current inventory surplus that remain bloated due to a combination of weak consumption from warmer-than-expected winter 2019-2020, coronavirus-induced drop off in usage and a dip in volumes flowing to LNG export plants. As of Jul 3, natural gas stockpiles held in underground storage in the lower 48 states stands at 3.133 trillion cubic feet (Tcf) - 685 Bcf (28%) above 2019 levels at this time and 454 Bcf (16.9%) over the five-year average.
With weather models suggesting continuation of this warming trend over the next few weeks, the storage surplus is expected to shrink that should push prices even higher from the current level of around $1.8 per MMBtu. This bodes well for companies that develop and sell natural gas.
The novel coronavirus outbreak remains a big catalyst for balancing the natural gas market. Analysts believe that the brake in skyrocketing shale oil production growth – tied to the crude price collapse - will also limit associated gas output, thereby cutting the massive supply glut. As a proof of the impending supply drop, the EIA expects that the United States will churn out 89.2 billion cubic feet a day (Bcf/d) of dry natural gas this year, down from the 2019 average of 92.2 Bcf/d.
The U.S. natural gas rig count, an indicator of future production, also points to the same. According to Baker Hughes (BKR - Free Report) , the gas rig count continues to decline, recently falling to a record low of 75 in the second week of July, down from 172 a year ago
Play the Rise in Gas Prices with These Quality Names
Scorching hot weather forecasts across the lower 48 over the next few weeks are likely to spur natural gas’ demand for cooling, and therefore prices, at least for the near term. The upward trend should aid gas-weighted producers. While adding these stocks to your portfolio looks prudent, picking winning stocks may be difficult.
Here, Zacks’ proprietary methodology comes in handy. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Rank is a reliable tool that helps you trade with confidence regardless of your trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education.
We have narrowed down our search to the following stocks:
SilverBow Resources, Inc. (SBOW - Free Report) : A pure play upstream operator in the Eagle Ford Shale in South Texas, SilverBow Resources is a natural gas-focused E&P company. The #1 Ranked firm has 165,000 net acres in the Eagle Ford and has surpassed estimates in two of the last four quarters, the average being 53.1%. Of SilverBow’s total output, 79% comprises natural gas.
Range Resources Corporation (RRC - Free Report) : The company, with a Zacks Rank of 2, has a strong footing in the prolific Appalachian Basin. In the gas-rich resource, the upstream firm has huge inventories of low-risk drilling sites that are likely to provide production for several decades. About 70% of the company’s total output is natural gas. Over 30 days, Range Resources has seen the Zacks Consensus Estimate for 2020 increase 15%.
Gulfport Energy Corporation (GPOR - Free Report) : The company's asset base – primarily focused on natural gas – is concentrated in the Utica Shale of Ohio and the SCOOP play in Oklahoma. Gulfport has a combined inventory in excess of 3,000 gross drilling locations in its two primary plays. Of Gulfport’s total output, nearly 90% comprises natural gas. The Zacks #2 Ranked company surpassed estimates in three of the last four quarters, the average being 31.3%.
We also present two companies, each carrying Zacks Rank #3 (Hold), that investors should watch out for.
EQT Corporation (EQT - Free Report) : EQT is primarily an explorer and producer of natural gas, with primary focus on the Appalachian Basin in Ohio, Pennsylvania and West Virginia. Notably, in terms of average daily sales volumes, EQT Corp is the largest natural gas producer in the domestic market. Approximately 95% of EQT’s production is natural gas.
Comstock Resources, Inc. (CRK - Free Report) : Comstock is a leading operator in the Haynesville shale – a premier natural gas basin - with 307,000 net acres. About 98% of the company’s total output is natural gas.
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