2 Natural Gas Stocks Worth a Closer Look Amid Price Volatility

The U.S. Energy Department's latest inventory report showed a slightly larger-than-expected increase in natural gas supplies. Despite this bearish data, futures ended the week higher, driven by forecasts for strong cooling demand.

However, natural gas remains down year to date, facing persistent challenges as the market reacts sharply to unpredictable weather patterns. Investors should focus on resilient stocks like Range Resources and Coterra Energy CTRA, while it may be wise to avoid higher-risk options like Comstock Resources CRK amid the prevailing market instability.

Natural Gas Build Larger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 58 billion cubic feet (Bcf) for the week ended Sept. 13, slightly above analysts' guidance of a 57 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 80 Bcf and last year's growth of 62 Bcf for the reported week.

The weekly build put total natural gas stocks at 3,445 Bcf, which is 194 Bcf (6%) above the 2023 level and 274 Bcf (8.6%) higher than the five-year average.

The total supply of natural gas averaged 107.2 Bcf per day, down 0.6 Bcf per day on a weekly basis, due to lower shipments from Canada and falling dry production.

Meanwhile, daily consumption dropped to 95.4 Bcf from 96.6 Bcf in the previous week, mainly reflecting weakness in residential/commercial usage and a dip in deliveries to U.S. LNG export facilities.

Natural Gas Prices Still Finish Higher

Natural gas prices climbed last week, despite a slightly unfavorable inventory build. October futures closed at $2.434 on the New York Mercantile Exchange, marking a 5.4% increase, driven mainly by warmer weather forecasts. This is the fourth consecutive weekly rise, yet natural gas remains down more than 20% over the past three months. This follows a 47% surge in April and May. Prices even dipped to a four-month low of $1.88 in late August, underscoring the market's ongoing volatility.

Natural gas prices remain pressured by strong production, high stockpiles, and weak demand due to mild weather. Current inventories are significantly above last year's levels and the five-year average, signaling a bearish outlook. In response, companies like APA Corporation APA and EQT Corporation EQT are scaling back drilling activities. APA plans to reduce natural gas output by 90 million cubic feet per day (MMcf/d) in Q3, following a 78 MMcf/d cut in Q2 due to low price realizations. Meanwhile, EQT, the largest U.S. natural gas producer, will maintain a daily production cut of 0.5 billion cubic feet through the year's second half.

Ironically, several companies had just resumed production that was deferred during the April-May price recovery, but the increased output quickly pushed prices down again, highlighting the market's fragility.

On the demand side, steady LNG feed gas deliveries continue to provide a strong boost for natural gas. U.S. LNG exports remain solid, fueled by environmental policies and Europe's push to reduce reliance on Russian gas amid the Ukraine conflict. As winter approaches, the global LNG market anticipates strong demand.

What Should Investors Do with Natural Gas Stocks?

The natural gas market continues to struggle with oversupply, still feeling the effects of a challenging 2023 when prices briefly dipped below $2 for the first time since 2020.

A short-lived rally, driven by favorable weather and reduced production, offered temporary relief. However, prices have since declined again, leading producers to cut output further.

In this volatile environment, with shifts in weather and production dynamics, investors should remain cautious. Focusing on fundamentally strong stocks like Range Resources and Coterra Energy may offer more stability amid the uncertainty.

Range Resources: The company is an U.S. independent natural gas producer with operations focused in the Appalachian Basin. Range Resources' large contiguous acreage position provides more than 30 years of low-breakeven, high-return inventory. This Zacks Rank #3 (Hold) company produced an average of 2,152.9 million cubic feet equivalent daily from these assets in the second quarter of 2024 — 69% natural gas.

Range Resources beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 31.6%. Valued at around $7.4 billion, RRC has risen 8% in a year.

Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, the firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. This #3 Ranked company churned out an average of 2,779.8 million cubic feet daily of the commodity from these assets in the June quarter.

Coterra beat the Zacks Consensus Estimate for earnings in two of the trailing four quarters and missed in the other two, the average being 5.9%. Valued at around $17.5 billion, CTRA has risen 5.4% in a year.

On the other hand, companies like Comstock Resources appear risky in the near term. CRK is a leading independent natural gas producer with operations focused on the Haynesville Shale in North Louisiana and East Texas.

Reflecting the negative sentiment around natural gas, the Zacks Consensus Estimate for the Zacks Rank #5 (Strong Sell) company's EPS has seen downward revisions. Over the past 30 days, analysts have lowered their estimates for both the current quarter and fiscal year by 30% and 12%, respectively.

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