Natural gas prices have continued their relentless slide after the latest inventory data showed the markets continue to be well supplied.
Early week gains
Natural gas (Henry Hub) prices have given up early-week gains, with prices currently sitting at $2.00 per MMBtu down from $2.19 per MMBtu on Tuesday. EIA weekly data revealed that gas stocks for the week ended April 7, 2023 clocked in at 1,855 Bcf vs. 1,830 Bcf for the week ended March 31, 2023, good for +25 Bcf injection vs -23 Bcf for the previous week. Gas prices are now down a staggering 56% since the beginning of the year. Unfortunately for the bulls, the short-term outlook remains bleak, with NatGasWeather saying storage surpluses are likely to expand further in the coming weeks due to light demand. Although there are some cool weather systems in the forecast, the latest weather models have trended warmer.
Favorable outlook
Thankfully, the longer term outlook is likely to be more favorable. Europe has failed to secure enough long-term LNG contracts to offset cut-off Russian gas imports, with Reuters predicting this may prove costly next winter and could sharply tighten the market. The European Union views natural gas as a bridge fuel in the transition to renewable energy, and buyers generally struggle to commit to long-term contracts. This means that Europe might be forced to buy more from the spot markets like it did in 2022, which in turn is likely to push prices up:
“Since the green lobby in Europe has managed to persuade politicians wrongly that hydrogen to a large extent can replace natural gas as an energy carrier by 2030, Europe has become far too reliant on spot and short term purchases of LNG,” consultant Morten Frisch told Reuters.
Given this backdrop, it’s hardly surprising that it has become more profitable to short natural gas equities than bet on them: the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD) boasts a juicy year-to-date return of 146%, incomparable to -79% return by the ProShares Ultra Bloomberg Natural Gas ETF (BOIL).
KOLD is an inverse ETF that provides daily -2x exposure to an index that tracks natural gas by holding one second month futures contract at a time while BOIL provides 2x the daily return of an index that measures the price performance of natural gas as reflected through publicly traded natural gas futures contracts.
That said, contrarian investors betting on a gas turnaround will be delighted to know that there’s no shortage of natural gas bargains in the space. Here are a few.
- EQT Corp.
Market Cap: $11.9B
YTD Returns: 2.9%
Pittsburgh, Pennsylvania-based EQT Corporation (NYSE: EQT) is the largest natural gas producer in the United States with ~25.0 trillion cubic feet of proved natural gas, natural gas liquids, and crude oil reserves across approximately 2.0 million gross acres.
EQT is not content with just being a lumbering gas giant, but has been expanding via acquisitions: in the third quarter, the company announced a $5.2 billion purchase of natural gas producer THQ Appalachia I LLC as well as associated pipeline assets of XcL Midstream in the biggest M&A deal for the quarter. THQ Appalachia, which is owned by privately held gas producer Tug Hill Operating. EQT said the assets acquired include ~90K core net acres offsetting its existing core leasehold in West Virginia, producing 800M cfe/day and expected to generate free cash flow at average natural gas prices above ~$1.35/MMBtu over the next five years. The company also doubled its buyback program to $2B, and said it is increasing its year-end 2023 debt reduction goal to $4B from $2.5B.
Last year, EQT unveiled a plan centered on producing more liquified natural gas by dramatically increasing natural gas drilling in Appalachia and around the country’s shale basins, as well as pipeline and export terminal capacity, which it said would not only boost United States energy security, but also help break the global reliance on coal and on countries like Russia and Iran. Its latest acquisition will, therefore, help the company meet its goal. EQT shares nearly doubled in 2022.
EQT Corporation is expected to report Q4 2022 earnings on 04/26/2023 after the market closes. According to Zacks Investment Research, based on 13 analysts’ forecasts, the consensus EPS forecast for the quarter is $1.38. Vs. $0.81 for Q1 2022.
- Antero Resources Corp (NYSE:AR)
Market Cap: ~$7B
YTD Returns: -16%
Down 16% year-to-date, and down nearly 30% in the past six months, Antero could be a decent buying opportunity. The stock has underperformed the broader market due to the slide in natural gas prices; however, if the expected increase in demand materializes, this one could turn around quickly. Markets are volatile and fickle these days.
Hedge funds are giving this one a fair amount of attention due to the potential upside given the company’s strong financials.
Hedge funds view Antero as having a relatively decent ROE (return on equity), pays no dividend, but reinvests heavily into growth.
That said, it’s worth noting that Wells Fargo has recently downgraded Antero from “overweight” to “equal weight”, but still gives the stock a nearly 42% upside.
- Cheniere Energy Inc (NYSEAMERICAN:LNG)
Market Cap: $37.2B
YTD Returns: 8.73%
While Cheniere is up 8.73% year-to-date, it’s also shed nearly 11% in the past six months as natural gas prices take investors for a ride. But the long-term picture suggests upside for the Houston-based energy company focused primarily on LNG production, shipping and marketing.
As one of the leading LNG exporters in the world, Cheniere is on solid ground long-term. However, the near-term concern is that the European Union’s natural gas storage units are still relatively full after a mild winter.. Some (including Cheniere) are worried that we could see some LNG cargo cancellations this summer as a result. Shortly after that, though, we will see another drive to fill storage ahead of the next winter season.
Be on the lookout for Q1 2023 results, scheduled to be released on May 2. Last earnings season we saw Cheniere bring in $15.78 per share, with revenue of $9.1 billion.
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Source: Oil Price
