Natural Gas Prices Are Rising. Here Is the Stock to Play It.


Investors in oil-and-gas firms are paying as a lot consideration to money circulate as they’re to what comes out of the floor.

For that cause, they need to flip their sights to

EQT

(ticker: EQT), the nation’s largest producer of pure gasoline. It is a disciplined firm that initiatives a free money circulate yield of greater than 10% subsequent 12 months.

“EQT has one of the best managements in the sector, and that has put the company in a position to thrive,” says Josh Silverstein, an analyst at Wolfe Research. “It has one of the most attractive free cash flow yields and represents one of the best values in the sector.”

Based in Pittsburgh, EQT is concentrated in the prolific gas-producing Marcellus Shale area of Pennsylvania. It lately agreed to purchase a privately held Marcellus operator, Alta Resources, for about $three billion in a deal that can permit it to lower drilling prices, speed up debt discount, and certain pace the begin of a dividend payout by 2022.

After the Alta deal, EQT will account for about 15% of gasoline manufacturing in the Marcellus, which provides a couple of third of the nation’s gasoline.

And with greater pure gasoline costs—up 15% this 12 months—EQT stands to profit, because it accounts for some 5% of whole U.S. output.

EQT trades at a reduction to different gas-focused firms, primarily based on its free money yield and its earnings earlier than curiosity, taxes, depreciation, and amortization (Ebitda), relative to its enterprise worth, says Wells Fargo analyst Nitin Kumar.

Ross Margolies, portfolio supervisor at Stelliam Capital Management, sees the inventory—now round $21—hitting $30 as traders put a better worth on the firm’s free money circulate. Silverstein has a $28 worth goal.

EQT sees $1 billion of free money circulate in 2022 and initiatives $5.5 billion by means of 2026.

Under a brand new administration group, the firm has improved its working effectivity over the previous 18 months.

Toby Rice, 39, grew to become chief government following a profitable proxy battle in 2019. He had turn out to be dissatisfied with the firm’s efficiency after family-run Rice Energy was bought to EQT in 2017.

“We have a great asset base, a deep inventory, and a long runway,” the CEO tells Barron’s. “That allows us to generate some pretty compelling free cash flow for our investors.”

There is the matter of a dividend. EQT isn’t paying one, after suspending a small payout a 12 months in the past when vitality costs crashed.

That affords a possibility for traders, although the inventory has risen 50% in the previous 12 months. EQT plans to tackle the dividend later this 12 months, and analysts count on one in 2022.

“Investors are rewarding companies for generating free cash flow, rather than production growth and for paying out the free cash flow in regular and variable dividends,” notes Bill Janela, a Credit Suisse analyst. The oil majors have lengthy emphasised dividends, and that focus is spreading to the remainder of the vitality sector.

Rice stated EQT is contemplating a set/variable payout, like these of another oil-and-gas firms, together with

EOG Resources

(EOG) and

Devon Energy

(DVN). These have a base dividend round 2%, designed to be paid all through a cycle, plus supplemental dividends, primarily based on earnings.

Here’s the math: EQT initiatives $1 billion of free money circulate for 2022. If it pays out 50% of that in dividends, it will translate right into a roughly 6% yield. Adjusting for the Alta deal, EQT has a market worth of about $eight billion.

The essential danger with EQT is that it has greater debt—greater than $5 billion—and prices than some friends, making it susceptible to any sustained weakening in gasoline costs. With gasoline presently round $three a thousand cubic toes, the driller’s all-in prices are roughly $2.40 a thousand cubic toes; they’re projected to drop to under $2.10 by 2026.

Looking out over the subsequent decade, the bull case on pure gasoline is that there might be higher demand for a cleaner-burning fossil gasoline. The development in electrical autos, whereas bearish for oil, may benefit gasoline, which fuels many electric-power crops.

“If you want to own a fossil fuel, it should be natural gas,” Margolies says. “A lot of coal will be displaced before you displace natural gas.”

Still, the latest success of an activist in profitable seats on the board of

Exxon Mobil

(XOM) highlights that vitality firms want to tackle investor curiosity in the business’s contribution to local weather change.

E=estimate

Sources: Bloomberg; firm reviews

EQT’s response is to turn out to be a frontrunner in “responsibly sourced gas.” The firm is utilizing impartial displays to consider its drilling, because it seeks to reduce emissions. It already ranks in the prime of the business and has a program to cut back its emissions of methane, a strong greenhouse gasoline, by 75%. One potential profit is a better worth for its gasoline.

“The world has a hunger for energy and is going to get that energy,” CEO Rice says. “We want to see production liberated in the U.S. because we can do it a whole lot cleaner than the rest of the world.”

EQT affords a serious play on the most engaging fossil gasoline.

Write to Andrew Bary at andrew.bary@barrons.com



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