Are these five gas crisis stocks worth a look?

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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.

Investing in North American energy

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The US stands at an energy crossroads. While it has long thrived on oil & gas, the world’s largest economy looks to be switching to clean sources for its power needs. With that in mind, we’re examining what both conventional and renewable energy in the US can potentially offer investors. 

Traditional & renewable energy in the US – a worthy investment? 

The wider North American energy picture 

The US needs an energy overhaul. Those are the signals coming from the Biden administration. The 46th President of the United States has made it clear his White House will be doing all it can to overhaul his predecessor’s less-than-enthusiastic attitude to climate change. For a start, Biden has realigned the United States with the historic Paris Climate Change agreements signed in 2016. 

Significant investment in clean power and renewable energy in the US is likely on its way throughout the next four years. At least. $380bn has been apportioned to the sector as part of a wider $2 trillion infrastructure plan. As such, investors are looking to some of the top US renewable energy companies for long term portfolio bolsters.  

But that is not to forget traditional energy sources. Shale oil and gas has turned the US from a net importer to a net exporter. 2021 however, has battered oil & gas markets – mainly oil – but demand recovery is predicted to surge throughout the rest of the year with economies worldwide opening up post-lockdown. 

Liquid natural gas (LNG) could also be a significant money-spinner for US energy firms. Rising import numbers from Asian markets are propping up the market currently. Feed gas volumes at Texan LNG terminals are nearing record levels at roughly 11 billion cubic feet per month. 

Midstream: a key component in North America’s energy system 

Midstream energy firms, i.e. those involved in the transportation, storage and processing of hydrocarbon products, make ideal investment vehicles. They are essential to the current fossil fuel-led global economy. This sector includes pumping stations, pipelines, storage facilities, tanker ships, tank trucks, and rail tank cars. 

Even in 2020, a torrid year for oil, yields from such investments could have been as high as 10%, as midstream firms typically operate on long, multi-year contracts with set fees. That gives them more dependable free cash flow compared with upstream (getting oil & gas out of the ground) firms, who struggled immensely due to the multi-billion-dollar cost of their activities. While midstream is expensive to set up, tax breaks ensure companies remain profitable by swallowing some of the cost. 

Looking at the Alerian Midstream Energy Index, an index tracking performance of midstream energy firms, we can see it gave a 10.4% yield in November 2020, and a 6.7% yield by March 2021. For context, the S&P 500 index’s yield for March 2021 was 1.5%.  

The case for US renewable energy for investors 

Moving back to renewable energy, there is a long term case for renewables. We spoke earlier about the Biden White House’s major spending plans. The current administration is targeting carbon-free nationwide electricity generation by 2035. That will require sustained capital injections across the solar, wind and other forms of clean power generation over the coming decade. A ten-year extension to the US’ current renewables tax credit scheme worth $400bn has been proposed too. 

Companies in the midstream oil & gas sector are looking to slash emissions. Natural gas pipeline company Williams Companies (WMB) is investing $400 million in solar installations to power its facilities and is targeting net-zero emissions by 2050. 

For investors looking to beef up their portfolios for companies with solid green credentials, or are just supplying clean energy and infrastructure, renewables companies could generate solid returns. 

This will take looking at the top renewable energy firms in the US, such as NextEra Energy. The Florida-based utility company is one of the nation’s clean power pioneers. It is currently in the midst of significantly boosting its green energy capacity, aiming to construct 30 GW of new power generation infrastructure by 2030. 

NextEra projects sales growth of 12% throughout 2021 too, although conservative estimates say a steady 6-8% rise per year until 2023 is more likely. Utility firms like NextEra work on fixed-rate power supply deals. That means firms like NextEra can count on steady cash flow generation. Factor in 5.5m Floridian homes already powered by NextEra, and its ambitious growth targets, long term ideals are there. 

Marketbeat recently upped NextEra’s target price to $75.00, with the stock currently trading at around $74, as of May 20th 2021. 

US renewable energy investment & risk 

When investing in North American renewable or conventional energy, risks must be taken into consideration. In 2020, for example, the pandemic caused the oil market to crash. It’s only now starting to claw its way back up but is nowhere near pre-pandemic levels of capital expenditure by oil companies, or product demand. Personal positions on oil as a commodity or on oil company stocks are likely to have shed considerable value across 2020. 

Renewable energy stocks are subject to volatility too. Turning back to 2020, we’ve seen utility firm share prices drop as they fail to get new projects off the ground owing to tougher working conditions or supply chains snags caused by Covid-19. Likewise, some equipment manufacturers have struggled to fulfil orders for the same reason, leading to their own share prices dropping. 

With any investment, be sure you can afford to ride out market volatility. Only do so if are comfortable taking any losses. 

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