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Ignore the Rough Week: Natural Gas Is Still Attractive

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Natural gas notched a substantial weekly loss, hurt by weather forecasts indicating above-normal temperatures over most of the country in the coming days. Futures for January delivery ended Friday at $4.132 per million British thermal units (MMBtu) on the New York Mercantile Exchange, plunging nearly 25% from the previous week’s closing. In fact, the contract settled at a four-month low of $4.056 on Thursday before recovering some ground the next day.

Still, the market is looking fairly balanced with support from unrelenting global demand for U.S. liquefied natural gas (“LNG”). As a matter of fact, natural gas prices are up more than 60% year to date and a staggering 180% from the 25-year lows in June 2020. At this juncture, investors would be wise to consider top-ranked, fundamentally sound gas-weighted producers CNX Resources (CNX - Free Report) , Chesapeake Energy (CHK - Free Report) , Range Resources (RRC - Free Report) and Comstock Resources (CRK - Free Report) .

What’s Behind the Steep Selloff?

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models anticipate milder temperature-driven consumption in December, which is a negative for prices. Apart from the lull in heating demand around this time of the year, there is also the issue of a steady rise in dry gas production levels.

Yes, there is a stable demand catalyst in the form of continued strong LNG feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record higher prices of the super-chilled fuel elsewhere. Most analysts believe that deliveries appear poised for further gains this year on surging consumption in Europe and Asia, especially as we head deeper into winter. The circumstances are particularly dire in Europe where gas supply is running low with the need for a steady refill from the United States ahead of the peak winter period. At the same time, promised flows from Russia have been limited.

But even the resilience in LNG exports is unable to offset the ill-effects of a mild domestic weather pattern. With forecasters calling for less-than-normal heating needs in December, there is a high possibility of muted withdrawals in the next few weeks. This has largely neutralized apprehensions that the market might face a supply shortage by the time winter is over. A warm October, coupled with resurgent production has already lifted stockpiles held in underground storage in the lower 48 states by some 275 billion cubic feet (Bcf) in the past two months.

The strong inventory build and a warm December outlook has brought back prices dangerously close to the $4 threshold after recently topping $6 MMBtu for the first time since 2014 and reaching a 13-year high settlement of $6.312 in October.   

Is There a Reason to Panic?

With the natural gas market being unpredictable and spooked by mild weather, investors are quite unsure what to do. However, we believe that the fundamentals of the fuel appear to be relatively tight for now. Also, Europe and Asia’s unsatiable demand for LNG has put a floor beneath prices for the time being. Finally, should weather models flip materially colder, there’s massive upside on the table. If that turns out be to the case, investors will do well to take a position in gas-weighted companies CNX Resources, Chesapeake Energy Range Resources and Comstock Resources.

CNX Resources has a projected earnings growth rate of 164.7% for the current year. The Zacks Consensus Estimate for CNX’s current-year earnings has been revised 55.2% upward over the last 60 days.

CNX Resources — carrying a Zacks Rank #1 (Strong Buy) — beat the Zacks Consensus Estimate for earnings in three of the last four quarters but missed once. It has a trailing four-quarter earnings surprise of roughly 35.4%, on average. CNX shares have gained around 44.9% in a year.

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

Chesapeake Energy has a projected earnings growth rate of 121.1% for the current year. CHK's consensus estimate for the current year has been revised 14.8% upward over the last 60 days.

Chesapeake Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters. The Zacks #1 Ranked stock has a trailing four-quarter earnings surprise of roughly 23.1%, on average. CHK shares have rallied around 46.8% in a year.

Range Resources has an expected earnings growth rate of 2,500% for the current year. The Zacks Consensus Estimate for RRC's current-year earnings has been revised 22.7% upward over the last 60 days.

Range Resources, valued at around $4.8 billion, carries a Zacks Rank of 1. RRC has soared 172.5% in a year.

Comstock Resources has a projected earnings growth rate of 508.7% for the current year. The Zacks Consensus Estimate for Zacks Rank #2 (Buy) CRK’s current-year earnings has been revised 27.3% upward over the last 60 days.

Comstock Resources beat the Zacks Consensus Estimate for earnings in three of the last four quarters and met once. It has a trailing four-quarter earnings surprise of roughly 42.5%, on average. CRK shares have gained around 62.4% in a year.