Since Russia invaded Ukraine in 2022, the oil and gas sector has shown a lot of volatility. Last year, crude oil per barrel price briefly hit its 13-year peak of nearly $130 in March. The Henry Hub natural gas spot price averaged around $8.81 per Metric Million British Thermal Units (MMBtu) in August 2022 and averaged around $6.42 per MMBtu for the full year. However, a mild winter and healthy LNG inflows in Europe led to a decline in gas prices since its peak. By the first quarter of 2023, the average gas prices were around $2.55 per MMBtu, showing a 40% year-over-year (YoY) and 57% sequential decline in prices.
The oil and gas sector has been in the news again as the US crude oil prices hit their lowest since August on November 7. WTI crude oil per barrel price dropped by 4.4% to $77.96 during the day. Nevertheless, due to the recent Israel-Hamas conflict, the prices have become uncertain again. According to TD Asset Management, if the conflict remains localized, the oil prices could remain conservative, but if other countries join in, it could touch $120 per barrel or even surge to $150.
Natural Gas Outlook
Natural gas prices averaged around $3.27 per MMBtu in January and remained low for the rest of the year. October was the best month for gas prices since January in which it averaged around $2.98 per MMBtu.
According to the US Energy Information Administration’s (EIA) short-term outlook posted on November 7, the US working natural gas in underground storage is around 6% above the five-year average at 3,835 billion cubic feet (Bcf). The agency expects this winter to be warmer than usual, while January and February are expected to be colder than last year. Due to these reasons, the EIA expects the natural gas spot prices to be around $3.40 per MMBtu through the winter and hit its peak in January 2024 at $3.60. For the current year, the average natural gas price is expected to be $2.67, and for 2024, the EIA forecasts an average price of $3.25 per MMBtu.
A Voice of America report suggests that around two-thirds of North America could face power outages this winter due to extreme cold and lack of natgas infrastructure. If this prediction holds true, the natural gas demand could increase drastically, and prices could rise substantially.
Natural Gas Forecast in Light of Net-Zero 2050 Goal
While the trends favor the renewable energy sector more than fossil fuels due to climate change concerns, natural gas still plays a crucial role in reducing carbon emissions. Natural gas is quite clean compared to other power generation sources like coal, oil, and wood. According to a report, between 2005 and 2019, the US energy sector’s shift from coal-fired power plants to natural gas reduced the total emissions by 32%.
In a December 2022 report by EY Global, it was estimated that the energy transition will require around $5.8 trillion each year to reach the net-zero 2050 target. It also suggests that the oil and gas sector has the capital strength, market reach, and intelligence to support the new technologies. Saulius Nerijus Adomaitis, EY Global Oil & Gas Leader, said:
“The oil and gas sector can, must and will play a role in solving the climate crisis. It is essential, therefore, that the sector not only survives, but thrives.”
Natural Gas Stocks Outlook
Compared to fossil fuels, renewable energy stocks performed poorly this year, and most of them are trading at a high price-to-earnings ratio due to their growth forecasts and catalysts. On November 8, Fidelity Clean Energy ETF and Invesco Global Clean Energy ETF were down nearly 32.5% and 23.5%, respectively. On the other hand, the oil and gas-focused Energy Select Sector SPDR Fund (XLE) was down nearly 2%.
Despite the falling natural gas prices during the year, some of the biggest natural gas stocks, such as EQT Corporation (NYSE:EQT) and Cheniere Energy, Inc. (NYSE:LNG), were up 25.36% and 21.13% year to date (YTD), respectively. However, the sector, as a whole, suffered significantly and as of November 8, ProShares Ultra Bloomberg Natural Gas ETF was down around 81%, and United States Natural Gas Fund, LP was down nearly 50% year to date. The EIA is forecasting better natural gas prices in the coming quarters, which can bode well for the natural gas stocks and the sector as a whole.
Some of the most undervalued natural gas stocks include Cheniere Energy, Inc. (NYSE:LNG), EQT Corporation (NYSE:EQT), and Chesapeake Energy Corporation (NASDAQ:CHK).
12 Most Undervalued Natural Gas Stocks To Buy According To Hedge Funds
Aerial view of a natural gas production facility with travelling pipelines extending from it.
Our Methodology
For this article, we made an extensive list of companies with significant operations in the natural gas sector. Next, we chose 12 companies with a price-to-earnings ratio of less than 6 as of November 8. We also skipped the companies with an overwhelming amount of sell ratings by the Wall Street analysts.
We listed the stocks in ascending order of their hedge fund sentiment which was taken from Insider Monkey’s database of 910 elite hedge funds.
12 Most Undervalued Natural Gas Stocks To Buy According To Hedge Funds
Vermilion Energy Inc. (NYSE:VET) is an Alberta-based company that carries out natural gas and oil exploration and production operations. The company currently operates in North America, Europe, and Australia.
On November 1, Vermilion Energy Inc. (NYSE:VET) reported its funds from operations of C$1.62 in the third quarter and revenue of C$475.53 million. In the quarter, the company lowered its net debt to C$1.24 billion from $1.32 billion in the previous quarter.
On November 6, Desjardins upgraded Vermilion Energy Inc. (NYSE:VET)’s stock to Buy rating from Hold and kept a price target of C$24.50 on the company shares.
On November 1, Vermilion Energy Inc. (NYSE:VET) declared a quarterly dividend of CAD 0.10, which is payable by January 15 to the shareholders of record on December 29. As of November 8, the dividend yield of the company is 2.33%.
Vermilion Energy Inc. (NYSE:VET) is one of the most undervalued natural gas stocks to buy according to hedge funds, along with Cheniere Energy, Inc. (NYSE:LNG), EQT Corporation (NYSE:EQT), and Chesapeake Energy Corporation (NASDAQ:CHK).
Baytex Energy Corp. (NYSE:BTE) is an Alberta-based company that carries out upstream oil and gas operations in the Western Canadian Sedimentary Basin and the Eagle Ford in the United States.
Out of the 910 elite hedge funds tracked by Insider Monkey, 17 hedge funds had investments in Baytex Energy Corp. (NYSE:BTE) in the second quarter, up from 11 in the previous quarter. In the second quarter, the company’s biggest hedge fund investor, SIR Capital Management, increased its stake by 109%. Additionally, billionaire Israel Englander’s Millennium Management was also highly bullish on the company stock and increased its stake by a whopping 341% to over 6 million shares worth nearly $20.95 million.
On November 2, Baytex Energy Corp. (NYSE:BTE) posted its Q3 GAAP EPS of C$0.15 and revenue of C$1.16 billion. On the same day, Baytex Energy Corp. (NYSE:BTE) declared a quarterly dividend of CAD 0.0225, payable by January 2 to the shareholders of record on December 15. The company’s dividend yield is 1.72% as of November 8.
Callon Petroleum Company (NYSE:CPE) is a Texas-based oil and gas exploration and production company. The company’s major operations are in the Permian Basin, Haynesville Shale, the Gulf of Mexico Deepwater, and the Gulf of Mexico Shelf.
On November 8, Mizuho Securities analyst Nitin Kumar lowered the price target on Callon Petroleum Company (NYSE:CPE)’s stock to $60 from $63 and kept a Buy rating.
On November 1, Callon Petroleum Company (NYSE:CPE) reported its Q3 earnings result with a non-GAAP EPS of $1.82 and revenue of $619.29 million, which surpassed the estimates by $44.89 million. In the quarter, the company’s total production average per day was 102,000 barrels of oil equivalent (BOE).
In Q2, the number of hedge funds with a stake in Callon Petroleum Company (NYSE:CPE) went down to 19 from 22 in Q1, but the total hedge fund investments increased to $219.567 million from the previous $154.382 million. Ryan Schedler And Bradley Shisler’s Condire Investors was the biggest shareholder of the company as it increased its stake by 76% to 1.485 million shares worth $52.080 million.
9. Northern Oil and Gas, Inc. (NYSE:NOG)
TTM PE Ratio as of November 8: 4.84
Number of Hedge Fund Holders: 22
Northern Oil and Gas, Inc. (NYSE:NOG) is an oil and gas company that carries out its development, acquisition, exploration, and production operations in the Williston Basin in North Dakota and Montana. It is one of the most undervalued natural gas stocks to buy.
On October 30, Northern Oil and Gas, Inc. (NYSE:NOG) increased its quarterly dividend by 5.3% to $0.40 per share and it is payable by January 31 to the shareholders of record on December 28. The company has been increasing its dividend for the past 2 years and has a dividend yield of 4.49% as of November 8.
According to TipRanks, 7 Wall Street analysts have covered Northern Oil and Gas, Inc. (NYSE:NOG)’s stock in the last three months, and 6 maintain a Buy rating. The average price target is $50.57, showing an upside of 41.85% from its stock price of $35.65 on November 8.
On November 1, Northern Oil and Gas, Inc. (NYSE:NOG) posted its third-quarter earnings result with a non-GAAP EPS of $1.73 and revenue of $313.97 million. In the quarter, the company’s quarterly production was 102,327 BOE per day, representing a growth of 29% YoY.
Ovintiv Inc. (NYSE:OVV) is an exploration and production (E&P) corporation that deals in natural gas, oil, and natural gas liquids (NGLs).
On September 26, Ovintiv Inc. (NYSE:OVV) announced its annual share buyback program of up to 26,734,819 common shares. The company has gotten regulatory approvals for the program, and it began on October 3, 2023, and will end on October 2, 2024.
On November 7, Ovintiv Inc. (NYSE:OVV) released its third-quarter earnings result with a GAAP EPS of $1.47. In the quarter, the company’s shareholders received $127 million in the form of base dividend payments and share buybacks.
Patient Capital Management mentioned Ovintiv Inc. (NYSE:OVV) in its third quarter 2023 investor letter. Here is what it said:
“Ovintiv Inc. (NYSE:OVV) reversed its trend from the first half of the year climbing 25.6% in the quarter as commodity prices caught a bid. The company is benefiting from increases in production due to improved well productivity across its portfolio combined with a lower level of maintenance capex. 40% of oil and 50% of gas exposure is hedge for the next twelve months providing insulation from fluctuations in commodity prices. Ovintiv continues to allocate 50% of post-dividend free cash flow (FCF) to debt paydown, and 50% to shareholder returns via either dividends or buybacks.”
Gulfport Energy Corporation (NYSE:GPOR) is an Oklahoma-based corporation that does oil and gas exploration and production in the Appalachia and Anadarko basins. It is one of the most undervalued natural gas stocks to buy.
On November 7, Mizuho increased the price target on Gulfport Energy Corporation (NYSE:GPOR)’s stock to $149 from $135 and maintained a Buy rating.
On October 31, Gulfport Energy Corporation (NYSE:GPOR) released its third-quarter earnings result with a net income of $608.4 million and adjusted EBITDA of $160 million. In the quarter, the company’s total net production was 1,056.9 million cubic feet of natural gas equivalent (MMcfe) per day.
On September 20, Gulfport Energy Corporation (NYSE:GPOR) announced an extension of its share repurchase program that was initiated in March 2022. After repurchasing nearly 76.2 thousand shares in the third quarter, the company will be increasing the program by 63% to $650 million, and the program’s duration was also extended through December 31, 2024.
6. Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR)
TTM PE Ratio as of November 8: 2.88
Number of Hedge Fund Holders: 33
Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR) is a Brazilian state-owned and operated company mainly involved in the exploration and production, refining, energy generation, and marketing of oil and gas. It is one of the largest oil and gas-producing companies in the world.
In the second quarter, 33 hedge funds held a stake in Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR) stock with a combined stake value of $3.8 billion. The most significant shareholder of the company was Rajiv Jain’s GQG Partners, with 211 million shares worth nearly $2.92 billion.
On October 17, Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR) announced a 10-year agreement with Excelerate Energy, Inc. (NYSE:EE) for a floating storage and regasification unit (FSRU) called Sequoia. The agreement, in effect from Jan 1, 2024, will not only help the company achieve its goal of energy transition in Brazil but also provide it with a reliable source of regasification.
Cheniere Energy, Inc. (NYSE:LNG), EQT Corporation (NYSE:EQT), and Chesapeake Energy Corporation (NASDAQ:CHK) are some of the most undervalued natural gas stocks to buy according to hedge funds besides Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR).
Petróleo Brasileiro S.A. - Petrobras (NYSE:PBR) was mentioned in Fairlight Capital’s third-quarter 2023 investor letter. Here is what it said:
“Throughout the year, we have reviewed thousands of companies, including many in the oil sector. While we are generally cautious about commodity-based businesses where the company lacks control over the price of what it produces, the valuations in several cases have reached extremely compelling levels. For example, Petróleo Brasileiro S.A. – Petrobras (NYSE:PBR) and Ecopetrol (EC). Petrobras has distributed dividends of over $2.30 paid this year3 , while Ecopetrol has traded as cheaply as the $9-$10 range (close to our purchase price) and is paying approximately $2.50 in dividends this year.
