Are these five gas crisis stocks worth a look?

As the European gas crisis threatens to go global, Morgan Stanley eyeballs some stocks that could benefit from the current conditions.

Gas crisis stocks

Gas prices soar in Europe

The EU’s natural gas import prices have skyrocketed 440% in recent weeks, putting massive strain on energy firms across the continent. The same is true in the UK where surging gas prices have caused several small energy suppliers to fold completely.

In the US, prices were up 100% year-on-year midway through September.

Globally, prices are roughly 250% higher than they were in January.

Henry Hub natural gas futures are showing rapid daily gains. At the time of writing, the HH contract is up over 7.2% in trading today. Prices are approaching yearly highs at $5.53.

We’re very rapidly approaching crunch time. The UK, for example, only has enough gas to last four or five winter days. Combine with food and petrol shortages, the winter is looking very cagey for Britain right now.

The US should also be gearing up injection season right about now. Usually lasting up to Halloween, injection season is when natural gas stocks start to build in preparation for high winter demand. The latest Energy Information Administration (EIA) data showed a build-up of 76 billion cubic feet (Bcf) for the week ended September 17th. This was higher than the expected 70 BCf – but stocks remain some 598 Bcf lower than this time last year.

Skyrocketing prices can be explained simply: there isn’t enough to go around.

Cold temperatures around the world last winter led to higher-than-expected drawdowns. Without adequate inventory replenishment, things were always going to escalate.

There is also heightened consumption and competition from Asia to contend with. Wood Mackenzie estimates that Asia, in particular China, will account for 95% of worldwide LNG demand growth by 2022. China’s appetite for LNG is such that even the $400bn, 30-year deal Beijing struck with Russia’s Gazprom in 2014 will not even scratch the surface of China’s gas requirements.

A perfect gas storm has been brewing and we’re seeing the cons

Which stocks can potentially benefit from the gas crisis?

According to Morgan Stanley, the current market conditions are ripe for investors and traders looking to add utility firms to their portfolios.

The five stocks selected by Morgan Stanley include:

  • Ørsted
  • Iberdrola
  • RWE
  • EDF
  • Engie

“Buy Ørsted (Overweight) and Iberdrola (Overweight) on weakness: We recognise that the recent gas clawback will have a negative impact on 2021 and 2022 earnings for Iberdrola … triggering EPS downgrades. However, this appears well priced in with Iberdrola’s market cap,” Morgan Stanley analysts said in a statement.

For context, the Spanish government has announced a 2.6bn euro tax on energy firms to help protect consumers.

The bank also said Ørsted has an estimated 34% potential upside to its price target, while for Iberdrola the figure is 38.7% (within Morgan Stanley’s 12-18 month price target).

Morgan Stanley also said: “We see RWE (Overweight), EDF (Overweight) and Engie (Overweight) as our preferred names to play the strength in power prices, with limited contagion risk from political intervention.”

According to the investment bank, RWE has a potential 35.4% upside to Morgan Stanley’s price target, the analysts estimated. For EDF the figure is 58.1% and for Engie it is 44.5%.

Of course, you could also look at trading pure natural gas contracts too away from stocks. Forecasts are calling for this winter to be one of the coldest for years, with the US meteorological department saying February will be the coldest month.

There may also be some overlap in the above for those interest in renewable energy. Ørsted covers 29% of the world’s offshore wind power segment. The Norwegian energy supplier made our list of renewable energy stocks to watch in 2021 as a result of its major market presence and future potential.