Natural Gas: Navigating Volatility Amid Inventory Pressures and Summer Demand

The U.S. natural gas market finds itself at a crossroads: abundant supply, a bearish inventory overhang, and uncertain weather patterns have clouded near-term price outlooks. Yet beneath the surface, the seeds of a rebound are taking root. For investors, the question isn't whether to dismiss natural gas entirely, but rather how to capitalize on the asymmetry between short-term headwinds and longer-term catalysts. Companies like Gulfport Energy (GPOR) and Coterra Energy (CTRA) are positioned to benefit most—if investors act strategically now.

The Bearish Overhang: Inventories, Weather, and Demand

The Energy Information Administration's (EIA) latest report paints a mixed picture. As of May 23, 2025, natural gas inventories reached 2,255 billion cubic feet (Bcf), 3% above the five-year average but 14% below year-ago levels. While this surplus has weighed on prices—Henry Hub spot prices hover near $3.30/MMBtu—analysts caution against overinterpreting the data.

Key drivers to watch:
1. Summer Heat Waves: Cooling degree days (CDDs) are already 67% above 2024 levels, driving electricity demand. The North American Electric Reliability Corporation (NERC) warns of a 10 GW surge in summer demand, even as 7.4 GW of coal and gas capacity has retired.
2. LNG Export Momentum: European demand for U.S. liquefied natural gas (LNG) has surged to 57% of exports, up from 48% in 2024, with Asian buyers like India also ramping up purchases. Twenty-nine LNG vessels departed U.S. ports in mid-May, carrying 109 Bcf of gas—a sign of global demand resilience.
3. Supply-Side Constraints: Despite record production of 106.5 Bcf/d in May, regional imbalances persist. The Midwest faces a 19% storage deficit, while the Pacific region's slower injection rate hints at logistical bottlenecks.

The Case for a Near-Term Bottom: Why Now Is the Time to Act

The market's focus on inventory builds overlooks three critical factors:
1. Price Elasticity of Demand: Natural gas prices at $3.30/MMBtu are near marginal production costs for many drillers, incentivizing cutbacks. The gas-directed rig count has already fallen to 100—down 28% year-over-year—a self-correcting mechanism that could tighten supply.
2. Forward Curve Dynamics: The spread between prompt-month prices and the 12-month strip is $0.68/MMBtu, suggesting the market already discounts a summer-driven rally.
3. Equity Valuations: Shares of GPOR and CTRA trade at discounts to their peers, despite strong balance sheets and production growth trajectories.

Gulfport Energy (GPOR): Betting on Utica's Dry Gas Play

Gulfport's first-quarter results underscore its shift toward high-margin natural gas. With 73% of production from the Utica and Marcellus shale plays, the company is laser-focused on exploiting regional supply deficits.

• Production Mix: 91% natural gas, with 20% growth projected by year-end.
• Financial Flexibility: $906 million in liquidity, $36.6 million in adjusted free cash flow, and $355 million remaining under its buyback program.
• Strategic Shift: A late-2025 drilling pivot to Utica's dry gas fields aims to boost 2026 cash flows. CEO John Reinhart's emphasis on operational efficiency—drilling efficiency up 28%—gives the stock a margin of safety.

Coterra Energy (CTRA): Balancing Gas and Oil Exposure

Coterra's dual focus on the Marcellus (natural gas) and Permian (oil and NGLs) positions it to thrive in a diversified energy landscape.

• Production Overperformance: Beat Q1 guidance with 3.04 Bcf/d of natural gas, while reducing Permian activity to prioritize cash flow.
• Debt Reduction: Cut term loans by $250 million, leaving $4.25 billion in total debt—a manageable load given its $663 million in Q1 free cash flow.
• Capital Reallocation: Added two rigs in the Marcellus and slashed Permian spending by $150 million, aligning capital with gas's improving fundamentals.

Why These Stocks Offer Asymmetric Risk/Reward

Both GPOR and CTRA offer exposure to a natural gas market poised for a summer-driven correction. Key catalysts include:
- Inventory Drawdowns: If July and August heat waves deplete storage below five-year averages, prices could spike.
- LNG Export Growth: European and Asian buyers may bid up prices as U.S. exports hit record highs.
- Balance Sheet Strength: Neither company requires drilling at breakeven to stay solvent—a rarity in today's market.

The Investment Thesis: Act Before the Heatwave

The bearish narrative around natural gas is well-known. What's underappreciated is the market's fragility to a demand shock. With Gulfport and Coterra trading at 4.5x and 5.2x EV/EBITDA, respectively—below their five-year averages—investors can lock in exposure to a potential price rebound at a discount.

Action Items for Investors:
1. Buy GPOR for its Utica dominance and free cash flow yield.
2. Add CTRA for its balance sheet resilience and Permian/Marcellus diversification.
3. Monitor LNG export data and CDDs weekly—both are leading indicators of a price inflection.

The natural gas market's volatility is a feature, not a bug. For investors willing to look past the inventory overhang, the summer of 2025 could be the backdrop for a compelling rebound. The question isn't whether to act—it's why you're waiting.