Natural gas prices have been exceptionally volatile due to a number of factors. This includes the explosion that occurred earlier this month at the Freeport Liquefied Natural Gas (LNG) terminal, one of the largest operators in the United States. Following the explosion, the Freeport facility stated that gas exports from its Texas facility could be hampered until late this year.
According to a Natural Gas Intelligence report, last week, the July Nymex futures contract was trading at $6.944 per million British Thermal Unit (MMBtu), a drop of 52 cents, while August futures were trading at $6.906, a fall of 53.2 cents.
According to a Wall Street Journal report from last week, natural gas prices have been at their highest this year and had hit $9.60 just before the fire at the Freeport facility. The report also states that exports of natural gas from the U.S. have picked up, following Europe’s decision to ban 90% of Russian oil imports by the end of this year.
In this scenario, earlier this month, U.S. President Biden issued directives to seven major U.S. refining companies to boost their capacities and increase the supply of diesel, gasoline, and other products.
Considering this focus on natural gas supply, we used the TipRanks database to look at two natural gas stocks that Wall Street analysts are bullish about. Let us take a look.
Cheniere Energy (NYSE: LNG)
Cheniere Energy, headquartered in Houston, Texas, is a producer and exporter of liquefied natural gas (LNG) in the United States. The company has one of the largest liquefaction platforms globally, “consisting of the Sabine Pass and Corpus Christi liquefaction facilities on the U.S. Gulf Coast, with a total production capacity of approximately 45 mtpa [million tonnes per annum] of LNG in operation.”
Even as the U.S. stock market has been rocked by volatility, shares of Cheniere have fared remarkably well and have soared 22.9% this year, even as the company delivered mixed Q1 results.
Cheniere’s revenues soared 142% year-over-year in Q1 to $7.48 billion, surpassing consensus estimates of $5.56 billion. However, the company swung to a loss of $3.41 per share in Q1 versus a profit of $1.56 per share in the same period last year. Analysts were expecting a profit of $3.49 per share in Q1.
However, LNG pointed out in its Q1 press release that this loss was primarily “due to an increase in derivative losses from changes in fair value and settlements of approximately $3.5 billion (pre-tax and excluding the impact of non-controlling interests) and a lower contribution from certain portfolio optimization activities.”
When it comes to FY22, the company raised its adjusted EBITDA outlook to between $8.2 billion and $8.7 billion and expects cash flow to be in the range of $5.5 billion to $6 billion. This raised guidance is projected to be driven by higher LNG prices and higher margins.
Even JPMorgan (JPM) analyst Jeremy Tonet is bullish on LNG, with a Buy rating and a Street-high price target of $193. Tonet’s price target implies upside potential of 53.6% from current levels.
The analyst is positive about LNG’s long-term sales and purchase agreements with different companies, which he believes will offer “greater long-term value.”
Tonet is of the opinion that improving LNG supply and demand conditions and the earlier-than-expected completion of Train 6 of the Sabine Pass Liquefaction (SPL) project “has added upside to cash flow generation.”
The rest of the analysts on the Wall Street side with Tonet and are bullish about the stock with a Strong Buy consensus rating based on nine unanimous Buys. The average LNG price target of $170.56 implies an upside potential of 35.7% at current levels.
Shell (NYSE: SHEL)
Shell is a British oil and gas company that operates in more than 70 countries. The oil and gas giant sold more than 64.2 million tonnes of LNG in 2021 and produced 3.2 million barrels of oil equivalent every day.
Shares of Shell have fared well this year even amid the broader market volatility, rising by 11.8% this year, buoyed by strong Q1 results. The company’s revenues jumped 51.3% year-over-year to $84.2 billion, handsomely beating analysts’ estimates of $44.8 billion. Shell’s Q1 adjusted earnings came in at $1.20 per share versus $0.42 per share in the same period last year.
However, even with these solid Q1 results, Evercore analyst Stephen Richardson believes that “once the noise surrounding the Russian exit subsides (IG [integrated gas] guidance was reduced notably this quarter) market focus will shift to where 2H22 and even 2023 cash returns will lag in what looks to be a once in a cycle opportunity to generate excess cash flows by the industry.”
The “once in a cycle opportunity” that the analyst is referring to is the supply shortage of oil and gas due to a ban on Russian oil, and soaring oil and gas prices even as global demand continues to rise.
For Richardson, the shift in the business portfolio and “operational challenges particularly in IG [integrated gas] have obscured the investment case and confidence in the outlook which has spilled over into valuation.”
Shell’s management stated on its Q1 earnings call that Russia’s war on Ukraine has resulted in the company withdrawing “from all Russian hydrocarbons in a phased manner. So, we have stopped buying Russian crude oil and liquefied natural gas or LNG on the spot market and we will not renew any long-term contracts.”
Earlier this month, Shell also sold off its retail and lubricants business in Russia to PJSC LUKOIL.
Considering these operational challenges, analyst Richardson is sidelined on the stock with a Hold rating and a price target of $60, implying an upside potential of 20.1% at current levels.
However, Shell gets a Strong Buy consensus rating from other analysts on Wall Street based on three Buys and one Hold. The average SHEL price target of $68.43 implies an upside potential of 37% at current levels.
The Bottom Line
These two companies seem to be well-positioned to take advantage of the rising gas prices. Also, Wall Street analysts are bullish on these two stocks.
