Perfect Storm for Natural Gas—What Are the Top Stock Picks?

Natural gas has become one of the best-performing commodities in 2021. On Sept. 8, the prices rose to a 7.5-year high. The prices have risen by nearly 100 percent YTD due to rising demand and supply concerns. Since investors want to bet on this red-hot commodity, many of them want to know what the best natural gas stocks are to buy now.

So far, 2021 is proving to be beneficial for commodities after a depressing 2020. The support from central banks, recovering demand, and COVID-19 vaccination programs have led to a surge in many commodities prices. Energy is one of the favorite bullish calls on the street as economies start recovering and driving up demand while OPEC opens the supply gates gradually.

Analysts forecast higher prices for natural gas as the winter months approach. The unprecedented heat during the summer months caused a surge in the demand for natural gas. As a result, less gas was put into storage for the winter months. Now, if we get colder winter than normal and natural gas prices could shoot through the roof. Goldman Sachs sees 100 percent more upside for the commodity in that case and natural gas could end up above $10 per one million MMBtu.

While natural gas isn't a completely clean source of energy, it's one of the cleanest fossil fuels. It releases less than half of the emissions of coal. Natural gas mixed with other renewable energy sources could provide a flexible and clean way to operate gas plants. Also, natural gas is expected to remain an important fuel for years. The EIA expects it to provide 35 percent of power generation in 2021 and 34 percent in 2022.

The supply-side issues still exist with almost 77 percent of Gulf of Mexico production still shut in and the U.S. production is also reeling from Hurricane Ida. According to the EIA, the U.S. gas storage level is 7.4 percent below the last 5-year average. The supply concerns at the time of rising demand have created a perfect storm for natural gas prices. It's natural for investors to seek natural gas stocks to play this theme.

The following natural gas plays seem to fit the bill:

• Chevron Corporation (CVX)
• ConocoPhillips (COP)
• Hess Corporation (HES)
• Occidental Petroleum (OXY)
• Pioneer Natural Resources (PXD)

Chevron is a multinational energy company that's also engaged in every aspect of the natural gas business. With a large balance sheet and strong management, it makes a solid case for long-term investment. Chevron has been paying dividends and its current dividend yield stands at 5.7 percent.

ConocoPhillips is engaged in hydrocarbon exploration. The stock has risen by almost 40 percent YTD and according to the consensus analyst target, it should rise by nearly 30 percent more in the next 12 months. The stock is also an attractive dividend play with a current dividend yield of 3.1 percent.

Hess Corporation stock has risen by nearly 28 percent YTD and analysts project another rise of 30 percent over the next 12 months. The company is close to achieving a milestone. Hess should break even very soon, which should set it up on a path of profitability. Analysts are positive on the growth prospects for Hess driven from Ghana.

Occidental Petroleum could be another good addition to your energy portfolio. Recently, Citi initiated coverage on OXY with a buy rating due to its strong free cash flow generating capabilities. On average, analysts see a rise of 13 percent in its stock price over the next year.

Recently, Goldman Sachs added Pioneer Natural Resources to the conviction buy list. The firm thinks that while Pioneer Natural Resources is out of money, hedges led to its underperformance compared to its peers YTD. Pioneer Natural Resources should outperform them going forward as its hedges roll out and it delivers on its FCF strategy. The stock also has a dividend yield of 4 percent.

Another way to play the current boom in natural gas prices is to invest in gas ETFs like the United States Natural Gas Fund ETF.