NATURAL GAS: An Investor's Guide To The Most Promising Commodity In The World

natural gas, shale, fracking

Photo: Matthew Lloyd/Getty Images

Morgan Stanley’s natural gas team, led by Stephen Maresca, recently came out with their massive 64-page Diversified Natural Gas Playbook, a guide to investing in the commodity through the next quarter.”Heightened macroeconomic concerns and falling commodity prices (particularly NGL prices)
have dominated investor discussions and will likely take centre stage for 2Q earnings,” they write.  “Despite these near-term headwinds, we reiterate our Attractive Diversified Natural Gas
industry view; our view is predicated on sustainable double-digit annual earnings growth
through 2014, driven by largely volumetric and contracted new projects.”

The guide takes you through the key themes in natural gas and it offers the best stocks in the business.

We pulled the highlights.

Natural gas price fundamentals have passed a bottom

MS' commodities team has a $3.95/mmbtu natural gas price forecast for 2013 but a $2.40/mmbtu price for the rest of 2012. Production is at its cyclical peak and is set to decline into 1Q13 while lower prices have induced greater gas generation demand. Together, these factors set the stage for inventories to shed their surplus later this year.

Source: Morgan Stanley

The stocks in the industry offer tremendous value for long-term investors

Hedge positions, oncoming projects and increasing fee-based volumes will help protect most companies; cash flows. As long as there is a decoupling of stock and commodity performance, the sector will remain attractive.

Source: Morgan Stanley

However, don't expect a lot of exciting announcements during Q2 earnings season

MS expects management teams to remain cautious on outlooks until commodity prices stabilise. But long-term growth outlooks should remain intact.

Source: Morgan Stanley

Oil prices, meanwhile, will continue to drift downward

Geopolitical tensions are easing, while macroeconomic conditions are weakening and inventories remain elevated after OPEC declined to curttail production. For 2012, MS forecasts a $105/bbl average Brent price. This affects gas players who are also in crude.

Source: Morgan Stanley

Merger and acquisition activity in the natgas industry will remain strong, which will bolster valuations

Thanks to increased drilling in liquid plays and new projects, and the need for some players to buy their way into new oil and gas plays, valuations are likely to go up.

Source: Morgan Stanley

Shale-driven infrastructure growth is firmly in a long-term bull market and has plenty of room to run

Although many players are shifting to liquids; oil rig counts in liquids-rich plays have been steady.

Source: Morgan Stanley

Well-established companies will find more success than new companies

Companies with existing asset positions in key plays and producer relationships are best placed.

Source: Morgan Stanley

Dividend yields are very attractive in the sector

MS' picks' get ~3.4% dividend yield and ~18% total return, especially attractive in light of a generally bearish for the rest of the S&P 500.

Source: Morgan Stanley

Morgan Stanley's analysts consider 6 stocks to be top picks

What follows are the 6 top picks in the natural gas sector.

NiSource, Inc.

Ticker: NI

Price Target: $26

Location: Merillville, IN

Specialty: Service and distribution

Comments: 'Numerous midstream opportunities surrounding its existing pipeline systems in the Marcellus provide exceptional longterm value, but also come with it increased capex and possibly heated competition.'

Source: Morgan Stanley

Spectra Energy

Ticker: SE

Price Target: $34

Location: Houston, TX

Specialty: Developer

Comments: 'Stable fee-based revenues (~80% of portfolio) that have little exposure to commodity prices. Strategically positioned assets, solid track record of above average ROIC, prudent financial management.'

Source: Morgan Stanley

Kinder Morgan, Inc.

Ticker: KMI

Price Target: $42

Location: Houston, TX

Specialty: Transportation and storage

Comments: 'A blue-chip midstream infrastructure behemoth. Scale, diversity of assets and stability of cash flows will increasingly reposition KMI as a core portfolio holding, with its C-corp structure broadening out the potential institutional investor base.

Source: Morgan Stanley

Williams Co.

Ticker: WMB

Price Target: $37

Location: Tulsa, OK

Specialty: Infrastructure

Comments: 'WMB is a principal beneficiary of long-term demand in natural gas and liquids infrastructure and gas processing.'

Source: Morgan Stanley

  • Ticker: WMB
  • Next 4 Qtrs Yield Forecast: 4.4 per cent

Targa Resources

Ticker: TRGP

Price Target: $54

Location: Houston, TX

Specialty: Midstream services

Comments: 'Organic growth through fractionation capacity expansions and new Permian Basin gathering/processing infrastructure provide high IRR projects with low execution risk.'

Source: Morgan Stanley

Crosstex Inc.

Ticker: XTXI

Price Target: $17

Location: Dallas, TX

Specialty: Midstream services

Comments: 'Scarcity value with mergers/buyouts of several other publicly traded GPs that also helps establish a valuation floor with reinstatement of dividend.'

Source: Morgan Stanley


Ticker: OKE

Price Target: $48

Location: Houston, TX

Specialty: Midstream services

Comments: 'OKE.'s interest in ONEOK Partners (OKS) is its primary growth engine (OKE owns ~40% of outstanding OKS stock plus the general partner). The GP interest provides strong cash flow growth (doubling within two years).'

Source: Morgan Stanley

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