2 Buy-Rated Natural Gas Stock to Add to Your Portfolio
Natural gas prices have surged more than 100% in 2021, from $2.50 to more than $6. This is due to a strong recovery in demand, extreme weather events, and the decreased supply.
As the winter season approaches, prices could soar even higher. Which is why today I will take a look at 2 natural gas stocks, EQT Corporation (EQT) and Range Resources Corporation (RRC), that I believe you should consider adding to your portfolio.
EQT Corporation (EQT)
EQT Corporation is a natural gas production company with operations focused on the Marcellus and Utica Shales of the Appalachian Basin. The company has approximately 19.8 trillion cubic feet equivalents (Tcfe) of proved natural gas, natural gas liquids (NGLs) and crude oil reserves across approximately 1.8 million gross acres, including approximately 1.5 million gross acres in the Marcellus play. EQT is focused on the execution of combo-development projects, which refers to the development of several multi-well pads in tandem.
Share of the natural producer lifted significantly since the beginning of the year, up 60.8%, nevertheless, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) outperformed it, surging 83.4% year-to-date.
Chart from Stock News
Recently, higher commodity prices and increased production volumes sustained the oil & gas industry, explaining the robust stock performance of EQT. Yet, after the release of its 3Q2021 earnings report, EQT’s shares have not been highly sought after, due to the massive $3.3b derivatives loss reported over the quarter and to rising worries that the tightness of the natural gas supply might come to a halt if coronavirus cases keep increasing.
In spite of that, the consensus of analysts show a bullish outlook on the energy company, with an average 12-months target price of $28.82 per share, representing a potential upside of 41.07%.
EQT’s top line is expected to lift significantly in 2022, as EQT’s net sales are estimated to advance rapidly in 2022, up 79.2% to $5.83b, but EQT’s growth should decelerate afterward, up only 8.8% in 2023 to $6.34b. On the other hand, EQT’s net income has suffered in the past year, bottoming at a net loss of $2.75b this year.
Going forward, the consensus of analysts is expecting a net improvement, as the company’s bottom line should turn positive in 2022, reaching $738m and expanding by 54.7% the following year to $1.14b. Interestingly enough, EQT’s EBITDA is on an accelerating path and is expected to advance rapidly, up 33.4% in 2022 to $31.4b and up 14.4% in 2023 to $3.6b.
Looking at EQT’s balance sheet, the oil and gas producer has a healthy financial structure, with net debt of $5.18b by the end of the year, corresponding to a leverage ratio of only 2.2x, which is low for the highly capital intensive oil & gas industry. Moreover, with a 2021 CAPEX of $1.11b, corresponding to 34.3% of its sales, EQT maintains a high CAPEX/Sales ratio which should contribute to sustaining its activity going forward.
In terms of valuation metrics, EQT is cheap, with a 2022e EV/EBITDA of only 5.39x and a 2022e P/E of 10.9x.
Range Resources Corporation (RRC)
RRC is an independent natural gas, natural gas liquids (NGLs), and oil company. The company is engaged in the exploration, development, and acquisition of natural gas properties. Its principal area of operation is the Marcellus Shale in Pennsylvania but also includes the Utica and Upper Devonian formations.
RRC’s stock performance overtook most of its peers and the XOP benchmark, lifting 244.4% year-to-date, as the company is close to reaching its breakeven point.
Chart from Stock News
After this strong performance, analysts are still positive on RRC’s equity story. Out of the 14 analysts following RRC, five are bullish on the independent natural gas company whereas the rest have a hold recommendation. But there is still upside, as the average target price of the consensus stands at $26.71 per share, corresponding to an appreciation of 13.95% in the next 12-months.
RRC grew top line in 2021 by 29.1% to $2.54b and it is expected to maintain this pace in 2022, as net sales should reach $3.3b, representing year-on-year growth of 30.2%. Important to note, RRC is approaching its break-even point and analysts are expecting the company to deliver its first profit in the last four years. The company’s bottom line should jump from a net loss of $231m this year to a yearly profit of $801m in 2023, which is constructive for current and future shareholders.
Moreover, the financial structure of the natural gas provider has improved over the past few years, indicating that its debt will not be a burden for the company in the following years. The independent oil & gas company has consistently worked on reducing its leverage over the past years and RRC’s net debt is now at $2.67b, corresponding to low leverage of only 2.05x.
With this strong balance sheet, RRC’s shares are trading cheaper than EQT in terms of both 2022e EV/EBITDA and P/E, which are respectively at 4.34x and 7.39x.
EQT and RRC have both benefited from higher oil & gas prices over the past year and are expected to continue to do so. The valuations of both stocks are relatively inexpensive, which is why it’s not surprising to see the consensus of Wall Street analysts give compelling price targets for the next 12-months.
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