Natural-gas stocks have soared this year as rising demand from Europe caused the commodity to hit its highest levels in over a decade.

But the picture next year looks more dour. Prices could be cut in half by the middle of the year, and reduce returns for American gas producers, predicts Matt Portillo, an analyst at Tudor, Pickering, Holt. Portillo lowered his ratings on EQT (ticker: EQT), Antero Resources (AR), and Coterra (CTRA) to Hold from Buy. Those companies are up 91%, 102%, and 40%, respectively, this year.

Natural gas is used primarily for heating and electricity, so a particularly cold winter could still cause prices to rise more this year. But after the winter, a lull may set in.

"We may be early as there is still plenty of potential winter weather ahead, but under a normal weather scenario over the next 18 months, we continue to see significant downside risk" to natural-gas prices, Portillo wrote.

A slump could also give consumers some relief, after a year when heating bills have spiked throughout the country.

By the second half of next year, Portillo expects U.S. natural-gas prices to fall to around $3 per million British Thermal Units, from over $6 today.

The problem is that supplies of natural gas have continued to rise, but demand hasn't risen enough to meet it. The U.S. now produces about 101 billion cubic feet (BCF) of natural gas per day, but demand is stuck around 98 BCF, Portillo said. Supplies are expected to be up about 5 million BCF by the end of December, compared to last year. And while supply may stay flat for the first half of 2023, it's expected to ramp up in the second half of the year, adding as much as 4 BCF more per day by the end of 2023.

Demand for natural gas may rise, too, as Europe fully weans itself off Russian supplies. But the U.S. has a limited ability to export its supplies. The U.S. has the capacity to export about 20 BCF per day, with about 14 BCF sent as liquefied natural gas by ship and 6 BCF by pipeline to Mexico. LNG shipments are depressed today because a key export hub in Texas run by Freeport LNG is still recovering from a fire earlier this year. Even when Freeport fully restarts next year, however, export capacity will be limited.

"Our view is that gap needs to collapse toward $3 or less in the second half of 2023, to effectively shut down supply growth in the first half of 2024, before you get LNG kicking in heading into 2025," Portillo said in an interview.

New LNG export capacity is expected to come online in 2025, allowing the U.S. to sell more supplies overseas. The growth in natural-gas shipments should lift U.S. prices back to $6 or even $7 in 2025, Portillo predicts.

For natural-gas producers, weak near-term prices could significantly hurt their returns, and ability to boost dividends and buybacks. There's an added concern for some companies who are particularly exposed to market prices next year. Natural-gas companies have historically hedged their production aggressively by locking in futures pricing. Those hedges hurt their returns earlier this year, because they had already locked in lower prices when natural-gas futures spiked. In response, several have been using fewer hedges, Portillo said. That leaves them more exposed if prices fall. Antero, Comstock Resources (CRK), and Coterra are among the companies that have fewer hedges, Portillo said.

He thinks there's still time for companies to add hedges, however, and put themselves in better shape ahead of the downturn.

"We continue to believe a more aggressive stance on hedging the strip would be beneficial as it would lock in strong free-cash-flow yields and mitigate near term risk while allowing investors to own equities through the cycle to play for upside in 2025+," he wrote.

And the downturn should set up a buying opportunity.

"Stocks tend to trade with movement in the 12-month [futures] strip," Portillo said. "We think there's probably on average 30% to 40% downside risk if the macro environment plays out [as we expect]. But that will create a fantastic buying opportunity as we head into 2025."