These Two Gas Plays Are 'Naturals'
Natural gas is getting a boost from regulatory and trade changes. Here's how I'm investing in the industry.
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I highlighted in my column on Monday how the environment for natural gas producers and pipeline operators has improved markedly over the past year or so. The new administration is much more supportive of the fossil fuel industry and is applying a lighter regulatory touch to the sector. AI data centers are going to demand a huge amount of electricity, which natural gas is ideally situated to supply. Finally, taking increased supplies of liquefied natural gas or LNG from the United States is one of the primary ways many countries will choose to bring down their trade surplus with America in short order to avoid more odious tariffs. This does not imply that natural gas prices will not continue to be volatile, just that the industry has some longer-term tailwinds.
In today’s article, I will spotlight a couple of the stocks in my portfolio that are well positioned to take advantage of the more supportive landscape for natural gas related stocks.
Let’s start with Kinder Morgan, Inc. KMI. It is hard to find a name that is more tied to the increasingly promising future of natural gas than this large-cap company. The company owns and operates a massive amount of midstream assets including pipelines and terminals as well as storage and transportation assets. The company either has major operations near every significant energy basin on the continent or has access to it through its connections to other midstream companies.
The company is well-positioned to benefit from the buildout of LNG capacity along the Gulf Coast as well as delivering the natural gas to the generators that will produce the huge amounts of electricity to AI data centers as they increasingly come online in the coming years. Kinder Morgan also has an interesting carbon dioxide business which is used for secondary recovery and could become increasingly important in removing carbon dioxide in the environment.
Kinder Morgan bested revenue estimates with its second quarter results last week. Net income attributable to the firm rose 24% from the same period a year ago. Kinder Morgan also should benefit from the bonus depreciation and greater interest expense deductibility within the recently passed 2026 federal budget. KMI pays a just over 4.3% dividend yield. That is lower than many midstream operators, but few are as well-managed or have the reach of Kinder Morgan. I enhance the yield from my holdings of Kinder Morgan by holding the name via covered-call positions.
Going much further out on the risk scale, I have established a small recent position in NextDecade Corporation NEXT. This company is focused right now on the construction of LNG and carbon capture and storage facilities. NextDecade Corporation operates withing a somewhat complicated network of subsidiaries and partners. The company’s primary focus right now is the buildout of its Rio Grande LNG facility. This is a large-scale liquefaction and export terminal located near the producers in the Permian and Eagle Ford basins. The facility is already approved and permitted for five trains that can produce 27 million tons of LNG annually, and that could eventually ramp up to ten trains and 48 million tons.
The project is being supported and financed via long-term contracts to supply LNG that run 15-20 years. First production should come online in 2027 and if all goes well, the company should be cash flow positive in 2028. As such it is a longer-term bet on LNG and NextDecade should continue to benefit from a much more supportive administration on the regulatory front.
At the time of publication, Jensen was long KMI, NEXT.
