Natural Gas Is in a Tailspin and There’s Almost Nowhere to Hide

By  Avi Salzman  Feb. 7, 2020 6:45 pm ET  barrons.com

People who follow the natural-gas industry say no end is in sight for the pain.

The U.S. uses 50% more natural gas than it did 10 years ago, a boom that would be considered a miracle in most industries. Growth in demand—helped by power plants abandoning coal—has continued in recent months, but the price of the commodity is plunging.

That is trouble for companies that produce gas. Their stocks are dropping. Six companies that produce gas in Appalachia were recently downgraded by S&P Global Ratings, and others were given negative outlooks.

Analysts and investors say there isn’t an end to the pain in sight. In interviews with a half-dozen people who follow the industry, none could think of a catalyst that would cause prices to rise until next winter at the earliest.

Natural gas fell below $2 per million British thermal units on Jan. 21, and have stayed there in February, closing at $1.86 on Friday. On Feb. 3, the price dropped to $1.82, its lowest level since March 2016.

One reason for the weakness is that the weather in the U.S. has been warmer than expected this winter, leading to a drop in demand for natural gas for heating. But there’s a longer-term problem that won’t be solved even if temperatures plunge.

America’s fracking boom has caused an oversupply of gas that still hasn’t been absorbed by all the new demand. Between December 2018 and December 2019, production grew by about 5 billion cubic feet per day, according to Bernadette Johnson, vice president of Enverus’ Strategic Advisory Group. “The price dropping this low this early in the year is pretty odd,” she said.

S&P cut its credit ratings on the gas producers on Wednesday, citing worries that gas prices are unlikely to rebound for years and that investors won’t lend money to the industry. The companies are EQT (ticker: EQT), Range Resources (RRC), Antero Resources (AR), privately held Ascent Resources Utica Holdings, CNX Resources (CNX), and Gulfport Energy (GPOR). None of the companies responded to requests for comment.

The analysts see natural-gas prices at low levels for an extended period. In December, S&P lowered its price outlook for gas sold at Henry Hub, a Louisiana pipeline, to $2.25 in 2020, $2.50 in 2021 and $2.75 for 2022 and beyond. The decline has also hurt larger companies like Chevron (CVX), which was forced to write-down assets due to the gas slump.

Some analysts had hoped America’s growing exports of liquefied natural gas would prop up prices. But that thesis hasn’t played out. LNG prices hit $3 per million British thermal units on Thursday, a record low for the superchilled, highly compressed product, according to S&P Global Platts.

Chinese energy company CNOOC (CEO) reportedly declared force majeure on LNG contracts this week, meaning it announced it will no longer honor commitments to buy and pay for LNG, due to forces beyond its control. CNOOC blamed the coronavirus, according to Bloomberg. The company didn’t respond to a request for comment.

Longer-term problems in the LNG market could affect prices for months. Current prices “reflect 9 months of weaker macroeconomic signals,” wrote Ira Joseph, head of Power & Gas Analytics at S&P Global Platts, on Thursday. “The coronavirus is just a symptom; lack of gas demand at almost any price is the pièce de résistance of this market.”

LNG also has a structural problem that could cause more disruption. Companies have signed long-term contracts to import it at prices well above current spot prices. Joseph calls the market structure “fundamentally flawed,” adding “these contract prices are 2 to 3 times higher and causing major market distortions.”

Given growing demand for natural gas, this might seem like a good time to buy the stocks, but analysts expressed concern that any rebound could be a long way off. Natural-gas prices may get much worse before they get better.

“There’s clearly a lot more downside risk at this point, more than people anticipate,” Andy Weissman, CEO of EBW Analytics Group, which follows the energy market, said in January. “There’s a major [technical] support level just above $1.61. I think there is a substantial risk that we’ll see $1.61 tested sometime over the next 10 to 12 weeks. It will depend in substantial part on the weather. It is even possible in my mind that either this spring or this coming fall that the supported level, will not hold, in which case you could see prices go to levels that we really haven’t seen at least in the last 20 years or so.”

Gas-storage levels are about 40% higher than usual in what is “normally peak demand season,” said Cowen analyst David Deckelbaum in an interview last month.

Deckelbaum doesn’t see much value among natural gas producers, even though some stocks are down more than 50% in the past 12 months. “Until you arrest those problems, particularly around the supply side, I think it’s difficult to put a bid in for the equities,” he said. “The best way to position is to be with names that can win in a war of attrition.” One company he does like is Cabot Oil & Gas (COG), a Houston-based company whose stock is down 15% this year.

“Even down to $2 Henry Hub gas they can be free cash generative, they still pay a dividend,” Deckelbaum said. “They probably have the most unlevered balance sheet within natural gas equities, lowest cost structure, lowest breakevens. They can outlast anybody in the space right now.”

Bernadette Johnson of Enverus also thinks Cabot is in “a relatively better position, just because they do have some agreements up in the Northeast where they sell their gas to local demand. So they’re not really as at risk as some others. Their cash flow situation is better. So a Cabot looks pretty good to me. For a lot of the other guys, it’s probably going to be a tough year.”