First Trust ISE-Revere Natural Gas Index Fund (FCG.US) $It's up a staggering 56% so far this year, but there are signs that the ETF still has more room to rise-many of its holdings still look valuable.

Although international oil prices have fallen recently, natural gas prices on the New York Mercantile Exchange (NYMEX) continue to rise. NYMEX natural gas futures are hovering around $6.70, the highest level in eight years.

Meanwhile, forward strip pricing for the rest of 2022 looks very strong. In the long run, the continued shutdown of coal-fired power plants and the global liquefied natural gas (LNG) export market should continue to play an important role.

NYMEX natural gas price

Data show that the first trust natural gas ETF has risen more than 50% so far this year, and Michael Fitzsimmons, a contributor to financial information and data statistics platform Seeking Alpha, recently wrote that this natural gas ETF seems to have more room to rise.

Fitzsimmons says it is not only because natural gas prices on the New York Mercantile Exchange are at a 13-year high, but also because there are a number of long-term positive factors in the industry-including very strong forward strip pricing. Fitzsimmons believes that FCG is worth allocating to investors as part of its diversified portfolio.

As most people are familiar with, there are several strong and very positive catalysts in the natural gas market-both in the United States and around the world. In the United States, dozens of coal-fired power plants have been decommissioned in the past decade or so, which means that cleaner energy-natural gas (carbon dioxide emissions are 50% lower than coal and toxic particulate matter emissions are reduced by 100%) is now the leading source of electricity generation in the United States:

In addition, natural gas power generation starts and stops much faster, making it more suitable for backup power for intermittent renewable energy than coal (or nuclear power).

In addition, tensions between Russia and Ukraine pose geopolitical energy risks, while Russia is still sending large amounts of natural gas to the EU through pipelines, while the EU is eager to cut off its dependence on Russian gas.

It is worth noting that the international natural gas price is still significantly higher than the US natural gas price, and in Fitzsimmons's view, the prospect of the enhancement of US LNG export capacity in the next few years seems very optimistic.

About the first Trust Natural Gas ETF

As shown in the chart below, the top 10 components of the first trust natural gas ETF account for 38.6% of the 44 constituent companies held. In other words, the ETF does not rely too much on the outstanding performance of a small number of companies.

First, compare the above companies with the top 10 natural gas producers in the United States to see the specific overlap. This is the last "top 40" list released by NGSA-probably because there have been a spate of mergers and acquisitions and asset sales in the industry over the past few years, and it will take a lot of time to deal with these developments to get a justified new report. But Fitzsimmons believes the list is still a good representation of the current major players in gas production in the United States:

$EQT Energy (EQT.US) $It acquired Marcellus producer Rice Energy in 2017, making it the largest natural gas producer. EQT accounts for 4.61% of the fund's position, ranking first in the fund. The stock has risen more than 80% so far this year, but the forward price-to-earnings ratio is still relatively low, at around 16x.

$Dayne International (DCP.US) $Is one of the largest natural gas collection and processing companies in the United States. DCP is$Phillips 66 (PSX.US) $和$Enqiao (ENB.US) $A joint venture between 50 and 50. DCP Midstream has grown by more than 70 per cent over the past year.

$Southwest Energy (SWN.US) $Ranked fourth in the ETF position, the company is also one of the top 10 gas producers in the United States. Southwest's share price has also doubled in the past year, but its forward price-to-earnings ratio is still just 5.8x.

$ConocoPhillips (COP.US) $Positions account for about 3.7 per cent, ranking fifth in the fund. In the past few years, ConocoPhillips has made two sizeable and well-timed acquisitions in Permian basins: the vast majority of Permian basins by Concho Resources and Shell.

ConocoPhillips also has a large LNG production capacity in Australia. ConocoPhillips produced more than $13.3 billion in free cash flow last year-due to sharp year-on-year increases in oil, gas and LNG prices (which are likely to exceed that figure this year).

Conoco pays both basic and variable dividends, but is more dividend-friendly than companies that are more dividend-friendly, such as$EOG Energy (EOG.US) $(the sixth largest position in the ETF) andVanguard Natural Resources (PXD.US) $ConocoPhillips puts more emphasis on share buybacks. ConocoPhillips shares have doubled in the past year, but are now trading at about 9.3 times forward earnings.

The eighth position is$Antero Resources (AR.US) $With a current weight of 3.64%, it is also one of the top 10 natural gas producers in the United States. Antero's fourth-quarter revenue significantly exceeded market expectations, but it was disappointing on a non-GAAP basis. Antero's fourth-quarter revenue was $2.4 billion, sharply exceeding market expectations of $1.4 billion and up 82.4 per cent year-on-year. AR has risen nearly 270% over the past year, but its forward price-to-earnings ratio is only 8 times.

NYMEX forward strip pricing

However, if natural gas prices hit bottom, they could become a value trap. However, in Fitzsimmons's view, forward strip must be taken into account. Strip usually refers to buying a call and buying two put options at the same time, where the call and the put have the same exercise price and expiration date.

In Fitzsimmons's view, the New York Mercantile Exchange (NYMEX) strip is very optimistic for the rest of the year, and the bullish forces in the market completely outweigh the bearish forces. Almost all natural gas producers in FCG ETF can generate large amounts of FCF (free cash flow) at a price of $4. Under natural gas prices above $6, they will generate a lot of FCF. Enough to make it easy for them to strengthen their balance sheets (if they need to) to increase dividends to shareholders and to make a large number of share buybacks.

In fact, the biggest problem facing CEOs of these companies is how best to allocate all the FCF they will generate this year.

Low valuation and decentralized configuration

While the share prices of most of the big US gas producers have risen sharply, Fitzsimmons believes their valuations are still relatively low.

In addition, it should be noted that many companies in FCG ETF also produce large amounts of high-priced oil, such as Western Oil companies, ConocoPhillips and EOG Resources. In this case, FCG ETF is actually a portfolio asset allocation of oil and gas production and prices, and has diversity. Although the fund is relatively expensive (0.6 per cent), for investors who want to invest in the industry but do not have the expertise or do not want to take the time to evaluate individual securities, Fitzsimmons stresses that the ETF is a way to gain better diversification exposure in the natural gas industry.

Fitzsimmons also pointed out that the ETF did not perform well in the biggest bull market in the new "era of energy abundance" triggered by shale gas. However, Fitzsimmons said that the current forward strip is very optimistic for most companies in FCG's holdings.

Risk

Due to the resurgence of the global COVID-19 epidemic, instability in Russia and Ukraine, which could turn into a tug of war, and higher inflation and interest rates, all of these factors could lead to a slowdown in US (and global) economic growth and even a severe recession, Fitzsimmons said. This will lead to a significant reduction in global demand for natural gas and put great pressure on natural gas prices.

Fitzsimmons mentioned that the availability of the rig and / or the availability of the staff is still limited to some extent. Last week, the number of rigs in the United States actually increased by 16. Although these rigs (+ 9) are mainly used for oil production in Permian areas, it is important to note that oil drilling can also produce large amounts of associated natural gas.

Fitzsimmons stressed that energy investors must be very clear that we are living in a new "era of energy abundance", if the oversupply in the US natural gas market reduces the price of natural gas to very low levels-below $3 for a long time. In this case, if the export volume of liquefied natural gas falls sharply, the domestic supply of natural gas in the United States will be excess and prices will fall.