Natural gas stocks have been lackluster investments in recent years, depressed by consistently low natural gas prices. But in recent weeks, natural gas prices have risen to their highest level since January. Natural gas stocks are surging as well, and are worth a look as we move into the winter.
Natural gas prices are sensitive to weather, because the fuel is widely used to generate electricity. Many U.S. coal plants have been converted to cleaner-burning natural gas in recent years. Normally, gas prices decline in the fall, as cooler weather reduces air conditioner usage and electricity consumption. But it’s been a warm fall in a lot of the U.S.—September had 20% more days when it was hot enough to use an air conditioner than normal. That’s kept electricity demand high, depleting natural gas reserves and causing a surge in prices.
At the same time, Hurricane Florence required several nuclear plants in North Carolina to shut down, further increasing demand for natural gas-generated electricity.
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If this warm fall is followed by a mild winter, natural gas prices are expected to return to normal, low levels. But if this winter is unusually cold, heating demand will probably keep gas stockpiles low, and gas prices could stay elevated well into 2019.
Plus, years of low natural gas prices have motivated significant investment in natural gas-fired industrial projects and natural gas export terminals, much of which will come online in 2019. Higher exports and greater usage of gas in industrial applications are raising demand and could keep prices high for even longer.
Top 3 Natural Gas Stocks To Buy
Investors who want to bet on the bull market in natural gas will find plenty of options, including a natural gas ETF, the First Trust ISE-Revere Natural Gas Index Fund (FCG), and two leveraged ETFs: the Direxion Daily Natural Gas Related Bull 3X Shares (GASL), and the Direxion Daily Natural Gas Related Bear 3X Shares (GASX). But all three ETFs hold (or short) oil and gas companies as well as pure natural gas plays. If you just want to be in natural gas, you have to do it by buying individual stocks.
Natural Gas Stock #1: ONEOK Inc. (OKE)
My favorite pure-play natural gas stock is ONEOK (OKE), pronounced “one-oak.” ONEOK owns and operates over 38,000 miles of natural gas and natural gas liquids (NGL) pipelines, running from North Dakota to Texas and from Kansas to Illinois. ONEOK also owns natural gas and NGL storage, processing and fractionation facilities in Kansas, Oklahoma, North Dakota, Wyoming, Montana and Texas. (Fractionation is the breaking down of NGLs into component liquids like ethane and propane.)
ONEOK has invested $9 billion in its network over the past decade, including $4 billion in the last year-and-a-half alone. (You can see a map of ONEOK’s growing network above.) ONEOK has also invested in making earnings more predictable, shifting most customers to fee-based contracts over the past five years, reducing exposure to commodity prices. In 2013, 66% of earnings were fee-based; this year, that number is expected to reach 90%.
Last year, the company acquired their associated MLP (master limited partnership), ONEOK Partners L.P., bringing the two firm’s assets under one roof and lowering their cost of funding. Following the transaction, the combined company raised its dividend to 75 cents per quarter, vaulting its yield over 5%.
ONEOK has paid dividends consistently since 1989, and has increased the dividend every year since 2003. The current annual dividend of $3.30 per share works out to a yield of 4.8% at current prices.
Natural Gas Stock #2: Atmos Energy (ATO)
Atmos Energy is one of the largest natural gas distributors in the U.S., and hit a new 52-week high this week. The company owns a large natural gas pipeline and storage system in Texas, and distributes natural gas to customers in nine states. Atmos’ distribution activities are tightly regulated by utility rate-setting commissions, and cash flow is reliable. Net income has risen in each of the last five years, by an average of 10% per year.
This year, analysts expect Atmos to report 17% revenue growth and 10% EPS growth. Next year, revenues are expected to rise by 12% and EPS by 8%.
Atmos passes much of that steady cash flow on to investors. The company has a 35-year history of dividend growth, raising the dividend every year since 1983. At the current annual rate of $1.94 per share, ATO yields 2.0%. Going forward, management expects to be able to increase the dividend by 6% to 8% per year.
Natural Gas Stock #3: Cheniere Energy Partners L.P. (CQP)
Finally, from Houston, Texas, comes Cheniere Energy Partners L.P. (CQP), which, as you can tell from the initials at the end of its name, is a master limited partnership, or MLP. Cheniere is leading the development of the nascent natural gas export industry in the U.S.
Before being exported, natural gas is cooled to -260° F, at which point it becomes a liquid, known as liquefied natural gas, or LNG. In 2016, Cheniere became the first company to ship LNG from a commercial facility in the contiguous U.S.
LNG is transported in specially-designed double-hulled ships at very low temperatures, and unloaded at LNG terminals with insulated tanks and regasification facilities.
Cheniere currently has four liquefaction units at its Sabine Pass facility in southwest Louisiana, and is building two additional units; the first will come online next year. Net income is rising quickly as they bring each piece online. After paying a 43-cent dividend for the last 10 years, they’ve raised it in each of the last three quarters.
Cheniere is also building a brand new liquefaction and export facility in Corpus Christi, Texas, which is expected to become fully operational in 2019.
There are some tax complications associated with owning MLPs, so if you’re not familiar with them, do a little research before buying the stock.
Chloe Lutts Jensen developed Cabot's proprietary Individualized Retirement Income System (IRIS) and Cabot Dividend Investor to provide both high income and peace of mind. If you’re retired or thinking about retirement, her advisory is designed for you.