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5 Upstream Stocks to Cash in on Natural Gas' Winter Rally

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Cold weather forecasts have strengthened the natural gas rally with prices nearly doubling 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 have gained from the bump in temperature-driven demand.

Already on the back of several tailwinds, natural gas is set to experience a ramp up in home and business-heating use. Riding on this positive momentum, prices ended the day at a 19-month high of $2.881 per MMBtu. Prices have also got a lift from the disruptions to the Gulf of Mexico production from Hurricane Delta – the latest in a record-breaking year of storms to hit mainland United States.

Supportive Weather

With the updated weather data revealing cooler trends over the fortnight — particularly in the north — heating loads should experience a consistent upward spike.

The onset of winter cold will translate into the burning of more gas to feed higher electricity consumption for space heating. According to the EIA's latest Short-Term Energy Outlook, natural gas’ share of electricity generation would rise to 39% this year from 37% in 2019. Therefore, as Americans crank up the heat to combat colder-than-normal weather, companies in the natural gas industry stand to make more money.

This should also significantly reduce the current inventory surplus. As of Oct 2, natural gas stockpiles held in underground storage in the lower 48 states stands at 3.831 trillion cubic feet (Tcf) — 444 Bcf (13.1%) above the 2019 levels at this time and 394 Bcf (11.5%) higher than the five-year average.

As demand for gas-fired electric generation rises, the storage surplus is expected to shrink and push prices even higher. This bodes well for companies that develop and sell natural gas.

Other Positives

Lower year-over-year domestic production and higher LNG prices in Asia and Europe — America’s chief export markets — and an active hurricane season have also contributed to natural gas’ recent strength.

In particular, 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 the associated gas output, thereby cutting the massive supply glut. As proof of the supply drop, natural gas production continues to be curtailed, with domestic volumes receding more than 7% year over year. So, we will have a tighter market going into 2021. In fact, the EIA forecasts an average price of $3.13 per MMBtu over the course of 2021, up significantly from this year’s projection of $2.07 per MMBtu.

Meanwhile, the recovering international LNG prices mean that overseas shipments have become profitable again. This should not only help relieve domestic exporters but also act as a bullish demand factor for U.S. natural gas prices.

Finally, periodic production shut-ins in the Gulf of Mexico because of frequent tropical storms are also responsible for the rise in prices.

Buy These Gas-Heavy Names

Favorable weather forecasts over the next couple of weeks are likely to spur natural gas’ demand for heating, and therefore prices, at least for the near term. The upward trend should aid gas-weighted producers.

To guide investors to the right picks, we highlight five companies that carry a Zacks Rank of #1 (Strong Buy) or 2 (Buy). The Zacks Rank is a reliable tool that helps you to 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.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Range Resources Corporation (RRC - Free Report) : The company, carrying a Zacks Rank #1, 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 60 days, Range Resources has seen the Zacks Consensus Estimate for 2020 surge 128.6%. The stock has soared 92.5% over the past six months.

CNX Resources Corporation (CNX - Free Report) : CNX Resources is a leading operator in the Appalachian basin — the most- prolific domestic gas basin — with more than 1.1 million net acres. About 96% of the company’s total output is natural gas. While the company’s low-cost, high-quality inventory should ensure long-term output growth, cash flows will also receive some downside protection from attractive hedges.

The 2020 Zacks Consensus Estimate for this Zacks Rank #1 company indicates 134.6% earnings per share growth over 2019. The stock has gained 9.2% over the past six months.

Gulfport Energy Corporation : The company's asset base — primarily focused on natural gas — is concentrated on 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. Robust execution and strong performance should aid Gulfport’s performance going forward.

Over 60 days, Zacks Rank #2 (Buy) has seen the Zacks Consensus Estimate for 2020 surge 220%. The stock has lost 14.8% over the past six months.

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 Zacks Rank #2 company’s total output is natural gas. A low-cost provider, the company’s leadership position in the Haynesville provides it access to the Gulf Coast and attractive pricing advantage.

Over 60 days, Comstock has seen the Zacks Consensus Estimate for 2020 increase 25.9%. The stock has lost 15.2% over the past six months.

Cabot Oil & Gas Corporation (COG - Free Report) : Cabot is an independent gas exploration company with producing properties mainly in the continental United States. The company — with a Zacks Rank of 3 — owns 174,000 net acres in the dry gas window of the Marcellus play. Cabot boasts of one of the strongest balance sheets among the natural gas-focused E&P group. The company's total assets are almost double that of its total liabilities, reflecting safety regarding debt payments, robust financing power and the ability to increase stock repurchases.

Over 60 days, Cabot has seen the Zacks Consensus Estimate for 2020 increase 14.8%. All of Cabot’s production is natural gas. The stock has edged up 0.2% over the past six months.

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