Seven Natural Gas Investments to Buy as Russia Slices Supply

Paul Dykewicz

Seven natural gas investments to buy have gained appeal as Russia recently slashed supplies to Europe as cold winter weather approaches.

The seven natural gas investments to buy could benefit from price increases if the Nord Stream 1 pipeline that transports Russian gas to Germany reduces production further than it already has thus far. A full stop to Nord Stream 1 would leave Germany particularly vulnerable if energy protectionism grows, likely causing gas inventories to struggle to hit 2021 highs and storage to fall “perilously low” by season’s end, according to BofA Global Research.

It is unclear how much faith to put into a claim by Russia’s Gazprom that part of the reason for its reduced supply of natural gas to Europe is due to “extended maintenance” of the Nord Stream 1 pipeline. The cuts to Europe’s flow of natural gas from Russia are occurring as the country’s attack of neighboring Ukraine extends past six months and has been met by a successful counteroffensive in the past week.

Inadequate paperwork for the recently maintained Nord Stream 1 gas turbine is the most recent in a “laundry list of issues” that Russia has given as reasons not to flow gas to Europe, BofA reported. As uncertainty about Russian supplies grows, Europe’s natural gas spot and forward prices are settling into a higher range, the investment firm reported.

Seven Natural Gas Investments to Buy Offer Inflation Protection

Despite Russia’s supply cuts, storage of natural gas in Europe has been built back to a five-year average, according to BofA. Key reasons for preventing a collapse in natural gas supply include high year-over-year exports of the energy source from Norway, strong U.K. output and a significant jump in liquefied natural gas (LNG) imports from nations other than Russia, BofA added.

LNG, created by cooling natural gas and reducing its volume to make it easier, safer and more efficient to ship around the world, has endured price hikes that have caused consumption to drop 12% year over year, BofA wrote in a recent research note.

Natural gas investments offer protection against inflation and the Fed’s interest rate hikes, since such companies wield pricing power with goods and services that are necessities for customers to heat their homes or buildings. The buyers of such essential products and services may be willing to accept a small or even larger increase in price.

Russia’s Export Cuts Fortify Seven Natural Gas Investments to Buy

Russia cut its export of gas from the pipeline to 40% of capacity in June and to 20% in July, while shutting off supply to European nations such as Bulgaria, Denmark, Finland, the Netherlands and Poland. The supply squeeze also applied to other nations in apparent retaliation for opposing Russia’s Feb. 24 invasion of Ukraine.

Gazprom has scaled back its flows via other pipelines since Russia attacked its neighboring nation in what the country’s President Vladimir Putin described as a “special military operation.” However, military action against a sovereign country like Ukraine violates international law, under Article 2 (4) of the United Nations Charter.

Pre-war Russia Supplied about 40% of Europe’s Natural Gas

Russia typically supplies about 40% of Europe’s natural gas, mostly by pipeline. Deliveries in 2021 totaled around 155 billion cubic metres (bcm).

Bob Carlson, a pension fund chairman who also leads the Retirement Watch investment newsletter, said recently added Cohen & Steers MLP & Energy Opportunity Fund (MLOAX) to all of his portfolios.

“Natural gas should continue to be a good investment, as long as Europe is looking for ways to reduce dependence on Russia,” Carlson told me. “In addition, the natural gas drillers in the U.S. are focused on increasing cash flow and earnings. They’re not inclined to maximize drilling expenses in the short run to increase output.”

Bob Carlson, who leads Retirement Watch, meets with Paul Dykewicz.

Good investment opportunities can be found with companies that provide the pipelines, storage facilities and other infrastructure needed to supply the world with natural gas and other energy sources, Carlson continued.

“One of the attractive qualities of these investments is that their revenues are independent of the prices of the commodities,” Carlson counseled. “The firms charge fees for their services, and the fees often are adjusted for inflation. Their revenues and earnings depend on the volume of commodities passing through their facilities, not the price of the commodity.”

The total returns of “leading” energy service companies are aided by current income and price appreciation, using investments in energy-related master limited partnerships (MLPs) and securities of industry companies, Carlson said. Those businesses are expected to derive at least 50% of their revenues or operating income from exploration, production, gathering, transportation, processing, storage, refining, distribution or marketing of natural gas, crude oil and other energy resources.

Chart courtesy of www.stockcharts.com 

The Cohen & Steers MLP & Energy Opportunity Fund recently held 49 positions and had 53% of the fund in the 10 largest positions. Top holdings of the fund were Enbridge (NYSE: ENB), Cheniere Energy (NYSEAMERICAN: LNG), Williams Companies (NYSE: WMB), Energy Transfer (NYSE: ET) and Pembina Pipeline Corp. (NYSE: PBA).

UNG Earns Spot on List of Seven Natural Gas Investments to Buy

Carlson’s other LNG recommendation is United States Natural Gas (UNG), an exchange-traded fund (ETF) that invests in natural gas futures contracts and related contracts on natural gas prices. The contracts are collateralized with cash and treasury securities.

The fund is designed to track, in percentage terms, the movements of natural gas prices. UNG issues shares that can be bought and sold on the NYSE Arca.

The investment objective of UNG is for the daily percentage changes of its shares’ net asset value (NAV) to reflect daily changes in the price of natural gas delivered at the Henry Hub, Louisiana. Those prices are measured by the daily changes in the Benchmark Futures Contract, less UNG’s expenses.

The Benchmark is the futures contract on natural gas that is traded on the NYMEX. If the near-month contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The natural gas contract pertains to natural gas delivered at the Henry Hub in Louisiana.

UNG invests primarily in listed natural gas futures contracts and other natural gas related futures contracts. The fund also may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents and U.S. government obligations that have remaining maturities of two years or less.

Chart courtesy of www.stockcharts.com 

Seven Natural Gas Investments to Buy Feature MLP

Bryan Perry, who leads the Cash Machine investment newsletter, proposes investing in energy through the Alerian MLP Exchange Traded Fund (NYSE: AMLP). That fund seeks investment results that correspond generally to the price and yield performance of the Alerian MLP Infrastructure Index. The index is a capped, float-adjusted, capitalization-weighted composite of energy infrastructure Master Limited Partnerships (MLPs) that earn most of their cash flow from midstream activities such as the transportation, storage and processing of energy commodities.

Paul Dykewicz interviews Bryan Perry, head of the Cash Machine investment newsletter.

The United States is the world’s largest producer of oil and gas, with MLPs providing exposure to long-lived assets that generate inflation-protected cash flows. Plus, MLPs have low correlations to other yield-oriented investment such as bond and utilities.

Dividend lovers will appreciate that Alerian MLP ETF offers a current dividend yield of 7.4% and paid $2.94 per share in the past year. The dividend is paid every three months and the last ex-dividend date was Aug. 11, 2022.

The MLP does not require investors to contend with a notoriously troublesome K-1 document at tax preparation time. I once asked a senior accountant at an industry-leading firm for his advice if an investment sends a K-1 to shareholders in preparing their taxes. “Sell it,” he responded.

Chart courtesy of www.stockcharts.com 

Seven Natural Gas Investments to Buy Include Exxon Mobil

Irving, Texas-based Exxon Mobil Corp. (NYSE: XOM) zoomed during its time as a recommendation in the Cash Machine investment newsletter between July 2021 and May 17, 2022, providing investors with exposure to liquefied natural gas (LNG), oil refining and strong returns. The company ranks as the world’s second-largest supplier of natural gas and jumped about 55% since its addition to the newsletter’s Safe Haven Portfolio.

Perry, who leads the Cash Machine investment newsletter, focuses on high-income investments. For that reason, Perry wrote that he recommended the stock’s sale when the company’s dividend yield dipped below his 4% minimum. 

With tight energy supply, Perry predicted XOM’s share price would remain well supported by investors seeking an alternative to the sagging stock market so far in 2022, even if Exxon Mobil no longer fit his requirement for a high-yield dividend stock. The company is one of the biggest producers of oil and natural gas worldwide.

Chart courtesy of www.stockcharts.com 

In 2021, Exxon Mobil, the world’s largest refiner, produced 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day. At the end of 2021, its reserves reached 18.5 billion barrels of oil equivalent, 66% of which were liquids. The company’s global refining capacity totals 4.6 million barrels of oil per day and ranks as one of the biggest manufacturers of commodity and specialty chemicals.

Oil prices have soared due to a combination of robust demand and constricted supply partly caused by Russia’s invasion of Ukraine, according to the Fast Money Alert advisory service co-led by Mark Skousen and Jim Woods. They wrote that the “smart money” is betting on higher energy prices. Even smarter, faster money is betting on XOM, they added.

Skousen, editor of the Forecasts & Strategies investment newsletter, recently wrote to his subscribers that he is recommending two stocks that are positioned to ride the wave of interest in natural gas. One is Enterprise Products Partners (NYSE: EPD), with a return of 28.9% so far in 2022.

EPD has benefited substantially from increased demand for natural gas and is amassing liquid natural gas (LNG) from processing natural gas at its facilities. It has 19,079 miles of natural gas pipelines and 19 processing facilities, storage and related LNG marketing activities.

Enterprise Products Partners is one of the largest publicly traded partnerships and a key North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products and petrochemicals. In addition, the company’s services include natural gas gathering, treating, processing, transportation and storage.

The company further provides NGL transportation, fractionation, storage and import and export terminals. It also offers crude oil gathering, transportation, storage and terminals, along with petrochemical and refined products transportation, storage and terminals, as well as a marine transportation business.

Chart courtesy of www.stockcharts.com 

I bought shares of Enterprise Products Partners shortly after the 2020 stock market crash to profit from what I perceived as an inevitable recovery. The surge in oil and natural gas prices since then has turned that decision into a nicely profitable one with the stock still on the ascent.

Cheniere Energy Is One of Seven Natural Gas Investments to Buy

Another way to profit from the growing demand for LNG is to invest in energy companies that export liquid natural gas. One of them is Cheniere Energy (NYSE American: LNG). Based in Houston, Texas, Cheniere Energy is the largest liquefied natural gas exporter in the United States.

Business is booming. Revenues surged 165% in the past year to $8.1 billion, and second-quarter earnings per share hit $2.90, compared to only 54 cents a year earlier.

Guidance is strongly positive — there is increasing demand from European customers looking to replace Russian gas. It recently has signed long-term contracts to deliver some 140 million tons of liquid natural gas through 2050. Cheniere Energy also is exiting its Corpus Christi Stage 3 project.

Chart courtesy of www.stockcharts.com

Starting in November of last year, Cheniere Energy began to pay a modest dividend of 33 cents per share. To further enhance shareholder value, Cheniere Energy also has repurchased 4.1 million shares worth $540 million in the most recent quarter.

Mark Skousen, a descendent of Benjamin Franklin, meets with Paul Dykewicz.

EOG Resources Joins Seven Natural Gas Investments to Buy

The U.S. LNG inventory remains below its five-year average for this time of year by double-digit percentages, said Michelle Connell, CFA, president and owner of Portia Capital Management, of Dallas, Texas. A key issue for the U.S. LNG industry is that production of that commodity has never been profitable on its own, but it is as a byproduct of oil production, she added.

“There isn’t enough oil being produced,” Connell said. “Currently, only 11.6 million barrels/day are being produced. Pre-pandemic, we produced 13 million barrels/day.”

Instead of investing to expand capacity, oil companies have focused on hiking their dividends, Connell continued. If they pivot, these companies face a backlash from investors who could sell their shares and crush the market value of these companies, Connell added.

Former portfolio manager Michelle Connell, CEO, Portia Capital Management

EOG Resources Makes List of Seven Natural Gas Investments to Buy

LNG companies cannot boost production quickly, Connell cautioned. Oil companies need a minimum of six to eight months to increase their oil and LNG output, Connell added. 

Production of oil via shale recently created the largest share of the America’s natural gas reserves, Connell continued. Unfortunately for proponents of increasing output to meet rising demand, shale production has “decreased exponentially” since the pandemic began and the buildup of LNG reserves has slid, Connell counseled.

However, Houston-based EOG Resources Inc. (NYSE: EOG) is producing substantial amounts of oil via shale, and LNG. Its Chief Executive Officer Ezra Yacob called the company’s recent financial results “outstanding” and said 2021 was a “tremendous year” for EOG with record earnings, record free cash flow and return of cash that places it near industry leaders.

Income investors will appreciate that the company’s long-standing focus on free cash flow led to payment of another $1.00 per share special dividend while also strengthening its balance sheet.

Chart courtesy of www.stockcharts.com

Connell’s reasoning for favoring EOG includes: 

-Wall Street investment firms such as Wells Fargo and Raymond James raised future earnings estimates and target prices on EOG, despite strong performance so far in 2022;

-Based on its fundamentals and increased energy demand, the 12-month estimated upside has jumped from 25% to 35%;

-The company is on a roll with a gain of 14% in the past month, 45% so far in 2022 and 97% in the past 12 months.

Connell raised a concern about whether EOG is too generous with its dividend payouts that equal 27% of profits. She wondered aloud whether it is leaving enough cash for reinvestment.

Ukraine’s Counteroffensive Raises Questions about What’s Next

Ukraine launched a potent counterattack last weekend that reportedly allowed it to take back more than 2,317 sq. miles, or 6,000 sq. km., from Russia’s control. In the Kharkiv region, the towns of Izyum and Kupiansk were regained by Ukraine last Saturday after that they previously had been seized by Russia and used as key hubs to supply invading forces in the Donbas region.

Even though Russia still holds about one-fifth of Ukraine’s territory, the counterattack is showing that the defenders of freedom are gaining ground. Whether those lands can be retained or even enlarged will be critical to the ultimate outcome.

Inflation Affects Energy Pricing Significantly

Another uncertainty is inflation. The U.S. Consumer Price Index for All Urban Consumers rose 0.1% in August, on a seasonally adjusted basis, after no change in July, the U.S. Bureau of Labor Statistics reported. For the last 12 months, the index for all items jumped 8.3% before seasonal adjustments.

Increases in the shelter, food, and medical care indexes were the largest of the broad-based monthly all-items advance. These increases were mostly offset by a 10.6% decline in the gasoline index.

The food index rose 0.8% for the month, but the energy index fell 5.0% in August as the gasoline index dipped, while the electricity and natural gas indexes climbed. The index for all items, other than food and energy, jumped 0.6% in August, a larger rise than in July. 

The all-items index increased 8.3% for the 12 months ending in August, smaller than the 8.5% increase for the period ending July. The energy index increased 23.8% for the 12 months ending August, short of the 32.9% rise for the 12-month period ending in July.

U.S. COVID Cases Near 95.4 Million

COVID-19 cases and deaths can affect supply and demand for products such natural gas, especially since the fuel can be obtained worldwide. Investors are wise to monitor COVID-19 outbreaks and lockdowns that can cause supply chain problems. As of Sept. 12, more than 70 cities in China were under full or partial lockdown as the country enforces its policy of zero tolerance of cases, even as the morbidity has decreased compared to earlier stages of the virus.

U.S. COVID-19 deaths rose for the seventh consecutive week by more than 3,000, jumping to 1,051,277, as of Sept. 13, according to Johns Hopkins University. Cases in the United States climbed to 95,387,374. America remains the nation with the largest number of COVID-19 deaths and cases.

Worldwide COVID-19 deaths in the last week dipped to about 12,000, compared to 14,977 during the previous week and more than 33,000 the week before that one, to total 6,517,721, as of Sept. 13, according to Johns Hopkins. Global COVID-19 cases slowed to a gain of just below 3.4 million in the past week, down from almost 4 million from the previous week. The new worldwide case total is 609,577,548.

Roughly 79.2% of the U.S. population, or 263,103,582, have received at least one dose of a COVID-19 vaccine, as of Sept. 7, the CDC reported. Fully vaccinated people total 224,367,691, or 67.6%, of the U.S. population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to 109.0 million people, up 200,000, compared to roughly 300,000 for the prior two weeks.

The seven natural gas investments to buy have strong potential to rise. With high inflation, recession risk after 0.75% rate hikes by the Fed in June and July, as well as possibly another in September, the seven natural gas investments to buy could fuel portfolios in the months ahead.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and

DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for multiple-book pricing.

 

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