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LNG Exports Fuel Natural Gas Optimism Despite Speed Bumps

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The U.S. Energy Department's weekly inventory release showed a lower-than-expected increase in natural gas supplies. Despite the positive inventory numbers, a set of bearish factors sparked a pullback in the commpdity. However, continued strong liquefied natural gas (“LNG”) feedgas deliveries suggest that the fuel’s prices will remain favorable in the short and medium terms.

Given natural gas’ fundamental set-up, prices might ease occasionally but should generally stay strong. The upward trend should aid gas-weighted producers Range Resources RRC, SilverBow Resources SBOW, Comstock Resources CRK and Antero Resources AR.

EIA Reports a Build Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose by 7 billion cubic feet (Bcf) for the week ended Nov 5 compared to the 15 Bcf addition guidance, per the analysts surveyed by S&P Global Platts. The increase was also below the five-year (2016-2020) average net build of 25 Bcf.

The latest injection puts total natural gas stocks at 3,618 billion cubic feet (Bcf), which is 308 Bcf (7.8%) below the 2020 level at this time and 119 Bcf (3.2%) lower than the five-year average.

The total supply of natural gas averaged 99.9 Bcf per day, edging up 0.2% on a weekly basis due to higher dry production, which was partially offset by lower shipments from Canada.

Meanwhile, daily consumption rose 5.7% to 96.6 Bcf from 91.4 Bcf in the previous week, primarily driven by stronger demand from the residential/commercial sector on the back of pre-winter cooler temperatures prevailing in a number of locations across the nation.

Natural Gas Still Registers a Weekly Decline

Natural gas prices trended downward last week despite the lower-than-expected inventory build. Futures for November delivery ended Friday at $4.791 on the New York Mercantile Exchange, falling more than 13% from the previous week’s closing. The decrease in natural gas realization is the result of higher production, a mild weather outlook (and the subsequent lull in heating/cooling demand), plus Russia’s renewed pledge to increase supplies to Europe to tackle the continent’s price explosion.

Wrapping Up

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models are anticipating moderate temperature-driven consumption, after which prices have gone down. The commodity also remained under pressure from growing dry gas production levels that has largely neutralized apprehensions that the market might enter the winter withdrawal season with a supply shortage. Finally, the resumption of Russian deliveries to Europe weighed on gas prices too.

Despite all this, the natural gas market appears to be relatively tight for now, mostly because of a stable demand catalyst. 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 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 heating season.

Consequently, the scenario for the primary U.S. power plant fuel is expected to be healthy. In fact, natural gas recently topped $6 MMBtu for the first time since 2014 and reached a 13-year high settlement of $6.312 in October. As a matter of fact, prices have almost doubled year to date and some a staggering 225% from the 25-year lows in June 2020.

As mentioned at the top, a good way to play this upward trend in natural gas prices is to buy energy operators that produce a lot of the commodity.

Range Resources: With a strong footing in the prolific Appalachian Basin, Range Resources is among the top 10 natural gas producers in the United States. In the gas-rich resource, Zacks Rank #1 (Strong Buy) upstream firm, RRC, has huge inventories of low-risk drilling sites that are likely to provide production for several decades.

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

Over the past 30 days, RRC has seen the Zacks Consensus Estimate for 2021 increase 14.1%. Natural gas contributed 68.9% to Range Resources’ latest quarterly production.

SilverBow Resources: Also carrying a Zacks Rank of 1, it has operations across roughly 130,000 net acres in the Eagle Ford and more than 80% of its total output comprises natural gas. SBOW’s exposure to premium markets and focus on costs and margins should help it to benefit from rising natural gas prices.

The natural gas finder, which focuses on growth through a combination of acquisitions and active drilling, maintains a strong balance sheet with no near-term debt maturities. Over 30 days, SBOW has seen the Zacks Consensus Estimate for 2021 increase 10.6%

Comstock Resources: A leading operator in the Haynesville shale — a premier natural gas basin — Comstock Resources has 323,000 net acres. About 98% of this Zacks Rank #2 (Buy) operator’s total output is natural gas. A low-cost provider, CRK’s leadership position in Haynesville provides it access to the Gulf Coast and an attractive pricing advantage.

Comstock’s 1,900+ high-return net drilling locations support its development program, while its conservative operating plan drives free cash flow. The 2021 Zacks Consensus Estimate for this Frisco-TX based producer indicates 513% earnings per share growth over 2020.

Antero Resources: The asset base of Antero Resources — primarily focused on natural gas — is concentrated on the Appalachian Basin. AR has amassed approximately 513,000 net acres of rich properties located in West Virginia and Ohio.

The 2021 Zacks Consensus Estimate for this Denver-CO based producer indicates 417.9% earnings per share growth over 2020. Antero Resources, which is valued at over $6 billion, carries a Zacks Rank of 2.

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SilverBow Resources (SBOW) : Free Stock Analysis Report
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