For market watchers, 2022 will be remembered as the year of the bear. Based on year-to-date performance, major indices are expected to see 2022 post negative returns.
However, the same cannot be said for natural gas stocks, which, boosted by macroeconomic conditions – namely Russia’s invasion of Ukraine – have generated excellent returns for investors, even taking into account of the segment’s recent decline.
Regarding the outlook for the natural gas sector in the United States, Jefferies’ Lloyd Byrne believes there is more growth on tap, despite the short term presenting headwinds.
“In the near term,” the 5-Star Analyst said, “we see the risk that North American natural gas production will outpace demand and potentially put pressure on Henry Hub in 2023 (all other things being equal). However, we expect demand growth in the medium term thanks to the start-up of LNG liquefaction plants in the United States and price resilience in the longer term due to the role of natural gas in the energy transition.
With the medium to long-term outlook for the commodity looking positive, Byrne believes now is the time for investors to build positions.
So with that as a backdrop, let’s take a look at two names that have already posted some serious gains this year but Byrne says have a lot more gas in the tank. At the same time, let’s check out the TipRanks database to see what the rest of the street does with those picks.
Antero Resources (RA)
We will start with one of the largest pure play producers in the US gas industry, Antero Resources. This $10 billion+ company operates primarily in the upper Ohio River region, the West Virginia portion of the Marcellus Shale and the Utica Shale of Ohio; This region of Appalachia is well known for hosting some of the richest reservoirs of natural gas and natural gas liquids in North America. In total, Antero’s assets include approximately 612,000 net acres in low-cost production areas.
In the second quarter of this year, the company produced an average of 3.2 billion cubic feet per day of natural gas and 160,000 barrels per day of natural gas liquids. In total, revenue grew 349% year-over-year to $2.2 billion. Antero posted net income of $765 million and free cash flow of $664 million. Net income was a dramatic turnaround from a net loss of $523 million in 2Q21 and led to EPS of $2.29. The company will release its third quarter numbers later this week (Wednesday, October 26).
Investors should note that Antero, while not paying a dividend, maintains an active share buyback program. The company spent $358 million on buybacks in HY22, including $247 million in the second quarter. Antero has $707 million remaining in its board-authorized buyout program and expects to complete the purchases this year.
Jefferies’ Lloyd Byme describes Antero as “ticking all the boxes,” and in his coverage initiation report this month, he writes, “Antero’s significant natural gas scale and exposure to liquids-rich assets complement the main “out-of-basin price exposure” to premium LNG markets in a constructive pricing environment, enabling robust FCF in the years to come and providing the financial flexibility to increase shareholder returns, opportunistically reduce debt on an already strong balance sheet and pursue strategic organic acquisitions, in our view.”
Byme gives the stock a Buy rating, and its price target of $47 suggests it has room for a 40% upside over the coming year. (To see Byme’s track record, Click here.)
The 7 recent analyst views on file for Antero include 5 buy and 2 hold, for a moderate buy consensus rating from the street. AR shares are priced at $33.47 and their average price target of $50.29 implies 50% year-over-year upside potential. (See AR stock forecast on TipRanks)
EQT Corporation (EQT)
Based in Pittsburgh, Pennsylvania, the second stock we’ll be looking at, EQT, is the largest independent pure play natural gas producer in the United States. The $14 billion company operates in Pennsylvania, Ohio and West Virginia, where it is developing world-class gas assets in the heart of the Appalachian Basin, where its footprint exceeds 1 million acres and includes approximately 20 trillion cubic feet of proven reserves.
Last month, EQT improved on this position when it announced that it had reached an agreement to acquire both Tug Hill and XcL Midstream, and a combination of generation and midstream assets, for a total of 5.2 billions of dollars. The acquisitions will bring a significant expansion to EQT’s operations in its central region.
In addition to the expansion, EQT reported strong second quarter results earlier this summer. Sales volume was 502 billion cubic feet, supporting $916 million in operating cash flow and $543 million in free cash flow. The company achieved adjusted EPS of 83 cents, far ahead of the 6 cents figure recorded in 2Q21. Like Antero, EQT will announce third quarter results on Wednesday.
EQT also manages a significant capital return for shareholders. The company uses both dividends and share buybacks in this program. In its second-quarter report, the company noted that it had increased the quarterly common stock dividend from 12.5 cents to 15 cents, as part of a comprehensive plan to return $4 billion to stockholders. by the end of 2023. At its current rate, the dividend cancels out. at 60 cents per common share and yields a modest 1.4%. The key to this dividend is less yield than reliability; EQT Corp hasn’t missed a quarterly dividend since it began making payouts in 1989. That reliable dividend is complemented by a $2 billion share buyback authorization.
This is another company that Byme has started hedging on, with a bullish comment: “We like the focus of EQT’s assets in the low-cost Appalachian Basin and the transition following management changes in 2019 which resulted in the acquisition of higher margin assets from Tug. Hill, Alta and Chevron, improved capital efficiency of 45% in 21 vs. 19 and continued focus on debt reduction, while returning cash to shareholders This is likely to continue… The scale coupled with the quality of inventory has led to improved breakevens, supporting our FCF profile We like the catalysts, including potential increases in shareholder returns and announcements of LNG contracts.
By setting his first rating on EQT stock, Byme is giving the stock a buy, and his price target, set at $57, indicates a 50% upside over the next 12 months.
EQT gets a unanimous vote from Wall Street analysts, with all 13 recent reviews agreeing it’s a stock to buy, naturally resulting in a strong buy consensus rating. The stock is currently trading at $37.88 and has an average price target of $62.77, giving it a potential gain of 66% year over year. (See EQT stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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