Natural Gas Is Rebounding. 3 Stocks to Play the Move. - Barron's

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Southwestern Energy Co.

Julia Schmalz/Bloomberg

Very hot weather is expected to hit the U.S. next week, and that could be good news for natural gas producers. Air conditioners will be running at full throttle to keep homes cool during the heat wave, and natural gas accounts for an increasing portion of electricity generation.

EBW Analytics Group CEO Andrew Weissman says that analysts are anticipating “some of the hottest mid-July weather on record.”

That heat wave and other factors are making analysts and investors more bullish on natural gas. Natural gas futures hit lows of $1.48 per million British thermal units on June 25, and averaged just $1.63 in June, the lowest monthly price since at least 1989 on an inflation-adjusted basis, according to the Energy Information Administration. The slump was brought on primarily by extremely low demand as the coronavirus forced lockdowns around the country.

But futures have since rebounded, rising more than 20% since the lows. Futures were trading around $1.85 per million BTUs on Thursday. The rally could continue. The EIA predicted this week that natural gas will average $3.10 per million BTUs next year.

“EIA expects falling production will put upward pressure on natural gas prices through the end of 2021,” the agency said.

Analysts have also predicted that natural gas will benefit from a decline in oil drilling in some parts of the country. Oil drillers produce associated gas that has increased gas supply and caused prices to slump. But the coronavirus has resulted in decreased oil drilling, and thus less associated gas.

With a possible price rebound on the horizon, MKM Partners analyst John Gerdes upgraded his rating on three natural gas producers to Buy: Range Resources (ticker: RRC), CNX Resources (CNX), and Southwestern Energy (SWN).

Gerdes set a new “long-term equilibrium” gas price at $2.80, a level at which more producers can make money (though some argue that gas prices have to hit $3.50 before the industry becomes solidly profitable).

He values each company based on a cash flow analysis. Gerdes expects Range to generate about $1.3 billion in free cash flow between 2021 and 2025, or about 75% of its current market cap.

His price target on Range is $9. Shares started the day up, but fell 1.1%, to $6.56, around 11 a.m.

His price target on CNX is $12. Shares were up 0.6%, to $8.84.

His price target on Southwestern is $4. Shares also began the day in the black, but fell 1.9%, to $2.63, around 11 a.m.

Write to Avi Salzman at avi.salzman@barrons.com

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