Cold Temps Make Natural Gas 2021’s “Hottest” Investment

Rates are rising alongside Covid-19 infections, and investors aren’t quite sure what to make of it. The market’s trading flat this morning as a result. Providing additional bearish pressure is the political uncertainty in Washington, where the House is set to impeach Trump this afternoon.

It’s not just Democrats who are on board with the impeachment plan, either. Republicans have increasingly switched sides over the last few days in an attempt to save face with moderate voters.

But the biggest concern remains rates, and how quickly they’re going to climb in 2021. The U.S. consumer price index rose 0.4% in December, falling in line with the Dow Jones estimate.

If rates keep going higher, Wall Street expects a rotation into cyclical stocks. Credit Suisse likes financials and energy.

And among the different types of energy firms, Goldman Sachs strategists like natural gas companies the most.

“Global gas markets have shifted from a bearish perfect storm last year to a bullish perfect storm,” wrote the Goldman analysts in a note to clients.

“A combination of supply disruptions, shipping delays and strong [liquefied natural gas] demand, supported by heavy nuclear maintenance in Japan and a cold start of the year in [northeast] Asia, have significantly tightened the [liquefied natural gas] market.”

The strategists continued, adding that natural gas shortages are unlikely to be completely covered by coal in certain regions of the world.

“In such a scenario, NW European gas markets would likely have to compete with Asia for [liquefied natural gas], creating further price upside potential.”

Growth has long been considered overcrowded, and value hasn’t necessarily “taken off” as many traders had hoped.

But perhaps it’s because they were looking in the wrong places. Many cyclical stocks, most of which fall into the value category, remain below their pre-Covid highs. Bulls haven’t been motivated enough to send those stocks on moonshot rallies like the rest of the market’s top pandemic gainers.

If Goldman’s right, though, and a natural gas shortage is on its way, the bidding war that follows could finally spike energy shares. And, in particular, energy stocks that have a big chunk of their business wrapped up in natural gas.

Among those companies are a few standouts due to their strong market positioning and average trading volume:

Royal Dutch Shell (NYSE: RDS.A), Kinder Morgan (NYSE: KMI), and Enterprise Product Partners (NYSE: EPD).

All three stocks work with natural gas. RDS.A is known for its oil business, but several years ago, it bought major gas exploration and production company BG Group for a bargain. That makes it the most natural gas-focused “big oil” company out there.

KMI and EPD, on the other hand, don’t actually produce any gas. Instead, they’re midstream pipeline operators. KMI has the largest natural gas pipeline in North America. EPD, meanwhile, focuses on liquified natural gases like propane and hexane, which sets it apart from other dry gas midstream companies.

Combined, these three stocks give investors the ability to profit off a natural gas boom in different ways. Each one should rise as natural gas prices do, too.

So, if you’re searching for value, the natural gas market – an “un-sexy” investment if there ever was one – could be just the spot to find it.

Especially now that rates are rising and growth stocks look ready to slump.


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