When Robert Rapier and I were asked by to pick our favorite stock for 2016 a year ago, we had little trouble settling on EQT (NYSE: EQT). Shares of the leading Appalachian gas driller proceeded to surge almost 50% in the first half of this year.

Now that gain has been cut almost precisely in half, most recently on largely groundless worries about the relatively modest production growth planned for next year. Yet EQT’s tremendous resilience in the face of low gas prices and the huge upside it still offers as these recover from unsustainable multi-decade lows makes it one of our top picks for 2017 as well.

To understand the value proposition start by considering a couple of crucial distinctions between oil and natural gas. Because crude is relatively easy to ship, the oil market is global in scope, with U.S. suppliers facing competition from the Middle East. Canada and elsewhere. In contrast, natural gas is a largely domestic affair, with U.S. consumers relying overwhelmingly on U.S. producers.

The other crucial distinction is the price. Even at $45 a barrel oil costs more than twice as much as natural gas with equivalent energy content. Gas is cheaper because it’s not a major competitor to crude as a feedstock for motor fuels. Gas also requires more midstream infrastructure for processing and shipping, and is mainly used in electricity generation and heating.

As one of the world’s cheapest energy sources, U.S. natural gas has been sought out by a variety of new consumers, with bullish implications for long-term demand and price. Liquefied natural gas terminals have been built, with more under construction, to freeze it for shipping by tanker overseas. Coal-fired power plants are rapidly giving way to gas-fired ones. Large chemical plants that will turn vast quantities of natural gas into value-added plastics are under construction. New pipelines are shipping rapidly growing volumes of U.S. gas to Mexico for use in power plants that previously ran on fuel oil. Commercial truck and bus fleets are increasingly running on compressed natural gas instead of diesel.

This ongoing shift in long-term demand has been temporarily masked by two straight warm winters and by last year’s record U.S. output, which lagged the industry slump that began a year earlier. So while inventories are high, production is down and demand is rising. That’s why the price has already roughly doubled from May’s 20-year low. 

Prices will need to hold up if production is to keep up with demand, and so they should. Although up a lot of late, they’re still very low by historical standards, and not high enough to make drilling for gas worthwhile outside the most productive shale basins.

That’s not as much of an issue for EQT, which controls 720,000 acres in the Marcellus, the most prolific and profitable gas basin on the continent, including 400,000 in the play’s liquids-rich core.

The resource is so good it has blessed EQT with some of the lowest costs and biggest gas gushers in the business, allowing it to increase production at least 25% in each of the last six years without taking on excessive debt.

Source: EQT presentation

The most recent downturn in the share price coincided with EQT forecast for 2017, which projects production growth of 9% fueled by $1.5 billion in capital spending, vs. operating cash flow of $1.2 billion. The company says much of next year’s spending will be setting the table for 2018, when production growth is expected to speed up again to 15-20% annually.

Recent production gains have been more than offset on the bottom line by the decline in gas prices. But the rapid volume growth has helped EQT build its midstream arm into a reliable income machine. EQT Midstream Partners (NYSE: EQM) still offers investors a well-covered 4.5% yield on a distribution growing 20% annually.

Nearly half of those distributions flow back to the parent company, which has listed its general and limited partner interests in EQM as a separate stock, EQT GP Holdings (NYSE: EQGP). Based on EQGP’s share price, the market was recently valuing EQT’s retained stake in EQM at roughly half of the company’s total value, even though it’s still contributing less than a quarter of the operating cash flow. Investors continue to place high value on  EQM’s growth prospects and EQT’s disproportionate benefits from that growth, tracked by EQGP.

The midstream arm doesn’t just gather EQT’s gas. It also ships it, along with flows from other drillers, along transmission lines connecting to long-haul pipelines. Those pipes are booked on favorable, firm and indexed terms of a decade or longer, and their reach is expanding alongside EQT’s drilling pads. The latest project will link the Marcellus, where gas is still often sold at wide discounts for lack of sufficient outlets, to fast-growing demand markets in Virginia and further south within two years.

Management has publicly mused from time to time about selling its midstream operations in their entirety. That remains a plausible scenario that could serve as a catalyst for EQT’s share price. Gas flows are essential to the value-added processors who extract natural gas liquids, purify them and either export the products or have plans to deploy them in their own chemical plants. EQT’s big footprint above the richest patch of the Marcellus makes control of its flows especially valuable.

Meanwhile, wells in the core of EQT’s acreage can recoup drilling costs in a little more than a year at $3.30 per million British thermal units. The company also controls nearly 500,000 acres in the Utica Shale, a barely tapped resource that overlaps the Marcellus and may prove just as profitable.

EQT is now the #9 Best Buy below $80 in the Aggressive Portfolio, alongside #4 Best Buy EQGP, which has a buy limit of $30.  EQM is a Conservative Portfolio Buy below $90.