The Natural Gas Bull Case Is Intact in The Long Term, But Risks are Elevated in 2026
High expectations and valuations among larger natural gas producers heighten the importance of a margin of safety amid near-term gas price risks.
“An investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes spectacular gains but with considerable risk of principal” - Seth Klarman
Margin of Safety is a key concept in stock investing, first popularized by Ben Graham and David Dodd in Security Analysis (1934). Put simply, the margin of safety is the gap between a stock’s intrinsic value and its market price, which provides a buffer against errors and unexpected problems. The larger the margin of safety, the more downside protection a stock has.
In a market as volatile as natural gas, a margin of safety is especially important for investments in producer and services equities. Over the past year, there were two once-in-a-generation natural gas demand drivers. Together, they generated a powerful bullish narrative around natural gas and related equities:
As AI data center investment accelerated, the market began to appreciate the large volumes of natural gas that will be required to power these facilities.
A wave of new U.S. LNG export projects began operations, with others moving closer to completion, opening U.S. gas production to global markets.
In anticipation of these demand drivers, gas producers traded up to much higher valuation multiples. That leaves less room for upside and more risk if gas prices do not meet expectations.
A good illustration of this can be seen in the performance of Comstock Resources (CRK), one of the more richly valued gas producers today. Compared with the natural gas stock I wrote about in The Deep Value, High Performing Natural Gas Play That The Market Has Overlooked, which trades at a much lower valuation, CRK has experienced far greater volatility over the past year, in response to gas price swings and shifts in market narratives. The stock I highlighted, with its much larger margin of safety, has been far less sensitive to those swings, and has moved steadily higher:
I believe the long-term gas bull thesis is still intact, but there are several factors to watch in 2026 that could temper near-term natural gas prices. My natural gas ideas have meaningful gas leverage but trade at a fraction of the valuation of their peers, offering what I believe to be a much larger margin of safety, and some have additional catalysts, so I am hanging on to them for now:
This weekend, there will be a Pro Tier live presentation and Q&A on the state of the natural gas market looking ahead to 2026, near term risks, and longer-term upside. After the exclusive Pro Tier live presentation and Q&A, key natural gas market risk factors, market analysis and supporting information will be disseminated to Premium subscribers in a follow-up article next week.
Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance may not repeat itself.