Natural gas prices are rising to multi-year highs as extreme heat has increased the demand for power.
Natural gas futures traded 1.4% higher on Wednesday, at $3.93 per million UK thermal units, on track for their fourth straight day of gains. Natural gas is up more than 53% since the beginning of the year and 130% from a year ago. Prices are back to where they traded in December 2018, when gas last traded above $4.
But lately, natural gas producers’ stocks have been depleted. They certainly don’t come close to the same boost as the resource. In fact, industry leaders love:
Cabot Oil & Gas
(ticker: COG) and
(EQT) have been roughly flat for the past two months, a period in which gas futures rose by a third in the first month.
John Gerdes, which covers oil and gas producers for MKM Partners, said in an interview Wednesday that the relatively weak performance of natural gas stocks was not surprising, as they trade on the price of longer-dated futures. While futures expiring in the next two months may fluctuate based on short-term dynamics such as weather, equity investors are more concerned about what the market might look like in 18 months or more as the companies will eventually face a recession. more normalized pricing environment, he said.
For example, the futures expiring in April 2023 are trading at $2.69. “Gas stocks are pretty well anchored in this $2.60 to $2.70 range,” Gerdes said. “They haven’t gone down that much, they haven’t gone up that much.”
In the short term, warm weather will push prices up, causing more people to use their air conditioners. Natural gas is today the largest source of electricity in the US. And supply hasn’t caught up to demand, pushing US inventories down
Higher prices may lead to producers gaining more gas in the short term and consumers to consume less. But natural gas is also traded in the longer term and current prices may not hold up if the coming winter proves to be mild and production begins to exceed demand.
In addition, there is now an ongoing debate about whether natural gas is a “bridge fuel” that could pave the way for the US to reduce CO2 emissions, or whether it should be phased out quickly in favor of renewables. If natural gas is considered an important part of electricity generation for decades in the future, producers could face years of growth. But a more aggressive climate policy could mean phasing out gas much sooner.
Nevertheless, Gerdes believes that there are now opportunities in the shares. He expects natural gas prices to eventually come in higher than stock prices currently imply, with an equilibrium price around $2.80 or $2.90 in the coming years. The companies he believes are trading at the greatest discount to their implied value at those gas price levels are:
(SWN), EQT and
Write to Avi Salzman at email@example.com