In May, natural gas prices at Henry Hub, the main U.S. pricing point, jumped to more than $8.00 per million BTUs, still well below the July 2008 peak of $12.69. Demand for natural gas is being driven by European demand for a replacement of Russian gas following the invasion of Ukraine. Demand for U.S. liquefied natural gas (LNG) is especially strong.
In a new research note from Umang Choudhary and his analyst team, Goldman Sachs remains bullish on U.S. natural gas stocks due to the high demand for LNG and the gas producers’ more disciplined approach to meeting that demand. That said, economic risks related to a June explosion at the Quintana, Texas, Freeport LNG export terminal and to future supply growth that is “likely to be met with very limited growth in US LNG exports.” The Freeport terminal may not return to service until September due to public safety concerns.
Gas producers are working with estimates of $2.95 to $3.13 per million BTUs for 2024 and 2025, based on an estimated Brent crude oil price of $90 per barrel. Futures trading currently has 2024 and 2025 prices at $4.57 and $4.37, respectively, and Goldman Sachs has estimated a mid-cycle price of $3.50. The analysts recommend that investors look for companies that offer “the best risk-adjusted returns in the near-term taking into account the company’s assets, balance sheet and FCF [free cash flow] outlook.”
Choudhary and his team have initiated coverage on Chesapeake Energy Corp. (NASDAQ: CHK) with a Buy rating and a 12-month price target of $106 per share. Based on Friday’s closing price of $83.18, the upside potential to Goldman’s price target is 27.4%. Chesapeake joins Antero Resources Corp. (NYSE: AR), EQT Corp. (NYSE: EQT) and Coterra Energy Inc. (NYSE: CTRA) as the four Buy-rated stocks in Goldman’s natural gas coverage.
At the other end of the spectrum, or what Goldman calls its barbell, Comstock Resources Inc. (NYSE: CRK) was downgraded from Neutral to Sell. The price target on the stock was left unchanged at $12. Comstock’s shares already trade above Goldman’s price target.
The other high-volatility barrel stocks are Range Resources Corp. (NYSE: RRC), which was maintained as a Sell, and two Neutral-rated stocks, Southwestern Energy Co. (NYSE: SWN) and National Fuel Gas Co. (NYSE: NFG).
Looking in more detail at Chesapeake, Choudhary and his team liked the post-bankruptcy acquisitions of Vine Energy and Chief Oil & Gas, the former located in the Haynesville play and the latter in Appalachia, that have given the company more than 15 years of inventory and potential free cash flow yields of 26%, 24% and 15% in 2022, 2023 and 2024, respectively, better than the industry average for gas-focused exploration and production companies. This allows Chesapeake to “deploy the bulk of its FCF towards a capital returns program — a combination of fixed/variable dividends and share repurchases.”
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