Shares of gas-focused companies that drill in Appalachia are among the only U.S. energy stocks that have risen this month
Ryan Dezember Updated March 25, 2020 4:42 pm ET
Traders are backing off their bearish bets on natural-gas prices, stock buyers are flocking to the beaten-down shares of Appalachian producers and analysts are forecasting short supplies of the fuel next year unless those companies get back to drilling.
All this comes with natural gas fetching its lowest price in a quarter-century and a global pandemic crushing demand from power plants and factories. It is also spring, when heating demand from U.S. households typically falls off a cliff.
Natural-gas futures for April delivery added 0.4% to close at $1.659 per million British thermal units on Wednesday. They hit a 25-year low of $1.602 on Monday.
But for the first time in years, the outlook is good, thanks to the oil-price war and the standstill to which the coronavirus has brought hundreds of millions of people, who now have little need for transportation fuels.
Collapsing demand for crude—and the corresponding crash in prices to levels below what many producers need to break even—has prompted U.S. oil drillers to slash their budgets and idle drilling rigs. The main U.S. price gauge rose 2% to $24.49 a barrel on Wednesday and is down 60% this year. The effect, besides a lot fewer barrels of shale oil flooding into a glutted market, is a lot less cheap natural gas.
More than 12% of U.S. gas production is so-called associated gas, which is produced as a byproduct of oil drilling, according to the Energy Information Administration. Wells in the Permian Basin in West Texas have proven particularly gassy.
Since producers there base the economics of their wells on oil prices, they haven’t been particularly responsive to low natural-gas prices. At a swamped trading hub in the Permian, prices have even gone negative for spells as drillers extracted record volumes of oil from the West Texas desert. Many producers there simply burn gas in the sky rather than pipe it to market.
The prospect of far less oil drilling in the Permian, North Dakota and other regions portends a greater market share for the gas-focused companies that drill in Appalachia.
Shares of such companies are among the only U.S. energy stocks—and some of the few U.S. stocks in general—that have risen this month. EQTCorp. shares have gained 32% in March, while rivals Southwestern EnergyCo., Cabot Oil & Gas Corp. and CNX Resources Corp. are up 31%, 19% and 11%, respectively.
Ryan Purpura, a Pittsburgh-based lawyer who heads the energy practice at McGuireWoods, said that deals for Appalachian gas assets basically died last year as prices for the fuel cratered amid a world-wide surfeit. Lately, though, big investors have shown renewed interest in such assets and are returning to negotiating tables.
“The flight to safety is to gas,” Mr. Purpura said.
Meanwhile, speculators in the commodity markets are backing off what had been the biggest-ever bet that natural-gas prices would fall. In mid-February, hedge funds and other money managers had made more than three wagers that gas was headed lower for everyone bet that prices would rise, according to Commodity Futures Trading Commission data. During the week ended March 17, traders had unwound enough short bets to bring the ratio to long positions to less than 2-to-1.
“There’s no downside left,” said Jen Snyder of RS Energy Group. “It’s shaping up to be a gas market that’s extremely undersupplied next year.”
Analysts generally expect prices this summer to remain below $2 per million British thermal units given how much power demand will be sapped by the pandemic. But banks and others, such as Ms. Snyder, expect prices to shoot up next year, given the diminished supply from oil drillers and austerity among Appalachian drillers, who just weeks ago were cutting spending plans in response to low prices.
Bank of America Corp. boosted its 2021 outlook to $2.45, up from $2.30. Goldman Sachs Group Inc. analysts are even more bullish, boosting their estimate for average prices next winter to $3.50 and next summer to $3, up from $3 and $2.75, respectively.
“The combination of lower U.S. gas production with a global recession this summer has set the stage for a ‘whiplash’ in U.S. natural gas markets,” they wrote in a note to clients this week.
Write to Ryan Dezember at email@example.com
Thanks for posting this, John. Ryan's logic makes sense. I hope his analysis holds up. NG mineral owners need a stimulus package, and this WSJ projection helps if we can juggle until 2021.
I bet none of us ever thought we would be glad to see price predictions of $2.45/mmbtu. :-) I think $3 is a stretch but both projections for next year depend on the drilling downturn to last into the third quarter 2020, at least. Keep in mind that there are still plenty of DUCs that can be completed pretty quickly and an increase in the rig count will have volumes increasing quickly come Q1 2021 if the downturn lasts well into the fourth quarter this year. Considering the plight that O&G/Field Service workers find themselves in, it seems misplaced to root for the oil price war to last long enough to make a major change in the natural gas price range.