Since the start of 2022, most equity indices are trading significantly lower from all-time highs. At the time of writing, the S&P 500 index is down 10% while the tech-heavy Nasdaq Composite index has entered bear-market territory, which constitutes a fall of more than 20% from record levels.
However, the energy sector has crushed the broader indices in 2022, due to higher commodity prices arising from the ongoing war between Ukraine and Russia as well as higher demand, all around the world. The Energy Select Sector SPDR Fund (XLE) is up 52% in the last year and has gained 33% in 2022.
As energy prices are likely to remain elevated this year, let’s see if you need to add natural gas stocks such as Southwestern Energy (SWN) and Tellurian (TELL) to your portfolio right now.
Southwestern Energy
Valued at $8 billion by market cap, Southwestern Energy is an energy company that is engaged in the exploration, development, and production of natural gas, natural gas liquids, and oil in the U.S.
Southwestern Energy is focused on the development of natural gas reservoirs in Ohio, Louisiana, Pennsylvania, and West Virginia. Its E&P business reported an operating income of $2.58 billion in 2021, compared to a loss of $2.96 billion in the year-ago period. Further, the business generated an operating cash flow of $1.71 billion in 2021, compared to $372 million in 2020.
Shares of Southwestern Energy have increased by 55% in 2022 and are up close to 80% in the last 12-months. Due to higher oil prices, investors expect Southwestern Energy’s adjusted earnings to rise at an annual rate of 13% in the next five years.
Despite its stellar gains, Southwestern Energy stock is valued at a forward price to earnings multiple of 5.4x which is quite reasonable.
Tellurian
Shares of Tellurian have more than doubled since April 2021 and are up 60% year-to-date, valuing the company at $2.54 by market cap. Tellurian is engaged in the natural gas business and has developed a portfolio of natural gas production, liquefied natural gas marketing as well as infrastructure assets including an LNG export facility of 27.6 million tons per annum.
Tellurian has built a pipeline to support the addition of the LNG export facility and aims to become the market leader for LNG exports in the U.S. It believes countries such as China, India, and other regions in Southeast Asia will drive LNG demand higher in the upcoming decade.
Investors need to understand that Tellurian is still in the process of building a robust LNG infrastructure and will need to raise capital multiple times in the future, resulting in shareholder dilution and volatility in stock prices.
The verdict
The global demand for energy is expected to drive prices higher in 2022 and beyond. In fact, the U.S. Energy Information Administration expects energy demand to rise by 47% in the next three decades, making both Southwestern Energy and Tellurian solid bets.
However, I believe the risks associated with investing in Tellurian right now are much higher due to the uncertainties surrounding the company. Tellurian will need to build a wide network of pipelines which in turn will generate future cash flows. Alternatively, Southwestern Energy’s predictable earnings and attractive valuation make it a top buy in an inflationary environment.
SWN shares fell $7.23 (-100.00%) in premarket trading Wednesday. Year-to-date, SWN has gained 57.51%, versus a -11.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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