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Natural Gas Gains 47% in 2021: Will It Climb Further in 2022?

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Natural gas prices rose 4.8% on the last trading day of 2021 to settle at $3.73 per million British thermal units (MMBtu), notching the biggest annual gain in five years. To be precise, the fuel closed out 2021 with a rise of some 47% — its best 12-month performance since 2016 — supported by higher cooling demand in the summer months, hurricane-related disruption in supplies, and a strong liquefied natural gas (“LNG”) export trend.

Despite seeing a banner year, there’s a lot of uncertainty surrounding the price trajectory of the commodity in 2022. Downward pricing pressure over the past two months due to a warmer-than-normal winter heating season thus far is making it difficult for investors to be optimistic about the space.

It would be wise to hold on to fundamentally sound gas-weighted producers SilverBow Resources (SBOW - Free Report) , Range Resources (RRC - Free Report) and Comstock Resources (CRK - Free Report) . If you are still looking for near-term natural gas plays, Chesapeake Energy (CHK - Free Report) might be a good selection.

In this short piece, let’s review what happened in the natural gas market in 2021 and what could happen in 2022.

A Look At the Year Gone By

The commodity was stuck within the range of $2.50-$3 per MMBtu through the first few months of 2021, as persistently mild temperatures across major population centers, tempered heating usage and led to underwhelming storage withdrawals. However, late-winter cold temperatures and snow in April, followed by early summer heat in June, helped push natural gas to more than $3.50 by the end of the second quarter.

Domestic usage remained strong over the next couple of months as record-breaking temperatures in most parts of the country led to impressive cooling demand for the fuel. A large part of natural gas’ run toward the highs was also supported by hurricane-curtailed supplies. The extreme weather events significantly disrupted natural gas production from the Gulf of Mexico and some of it remained offline for extended periods. The platform shutdowns temporarily dragged down daily production to around 90 billion cubic feet (Bcf) when an average of around 93 Bcf is needed to balance the demand.

At the same time, demand from the commercial and industrial front started to resurface as pandemic-related restrictions were lifted, economic activity picked up and energy consumption rebounded, following the successful deployment of vaccines.

Throughout all of this, natural gas remained supported by 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. Deliveries gained during the course of 2021 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 going into the peak winter period. At the same time, promised flows from Russia have been limited.

By October, natural gas topped $6 MMBtu for the first time since 2014 and reached a 13-year high settlement of $6.312. But since then, the commodity has lost more than 40% in value on consistently milder-than-normal temperatures, which translates into smaller draws due to less use of heaters.

The Outlook for 2022 & Investing Strategy

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. Toward the end of 2021, the models called for cold snaps (or intense temperature-driven consumption) during the first two weeks of the new year, which helped to bolster prices. But more recently, the weather pattern turned less severe, slightly denting cooling demand expectations and reversing some of the price gains.

Even the resilience in LNG exports cannot offset the ill-effects of a mild winter so far. With less-than-normal heating needs in December, withdrawals have been muted. The tepid inventory draws on the back of a warm December has brought back prices under the $4 threshold.

With the natural gas market being unpredictable and spooked by mild weather, investors are quite unsure of what to do. As of now, the lingering uncertainty over the fuel means that investors should preferably wait for a better entry point before buying shares in natural gas-focused companies SilverBow Resources, Range Resources and Comstock Resources.

SilverBow Resources is valued at around $380 million. SBOW went on to make a 52-week high of $34.83 in October. The company’s shares have rocketed 326.7% in a year.

SilverBow Resources — carrying a Zacks Rank #3 (Neutral) — reported EPS of $2.69 in November, reflecting a 30% surprise over consensus. SBOW 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 1.5%, on average.

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

Range Resources has an expected earnings growth rate of 82.2% for the current year. RRC has a Zacks Style Score of B for Value, A for Growth and A for Momentum.

Range Resources, valued at around $4.8 billion, carries a Zacks Rank of 3. RRC has soared 151% in a year.

Comstock Resources has a projected earnings growth rate of 71.5% for the current year. CRK sports a Zacks Style Score of A for Value, Growth, as well as Momentum.

Comstock Resources beat the Zacks Consensus Estimate for earnings in three of the last four quarters and met once. The Zacks Rank #3 company has a trailing four-quarter earnings surprise of roughly 42.5%, on average. CRK shares have gained around 84.6% in a year.

Having said all of this, we believe that the fundamentals of natural gas appear relatively tight for now. Also, Europe and Asia’s insatiable demand for LNG has put a floor beneath prices for the time being. Finally, should weather models flip materially colder (as is expected in January), there’s massive upside on the table. If that turns out to be the case, investors will do well to take a position in Chesapeake Energy.

Chesapeake Energy has a projected earnings growth rate of 12.2% for the current year. CHK's consensus estimate for 2022 has been revised 8.3% upward over the last 60 days.

Chesapeake Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters. The Zacks Rank #2 (Buy) stock has a trailing four-quarter earnings surprise of roughly 23.1%, on average. CHK shares have rallied around 62.4% in a year