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A Cabot Oil & Gas natural gas drill rig in South Montrose, Pennsylvania.
Spencer Platt / Getty Images
Natural gas prices are skyrocketing to multi-year highs as extreme heat has pushed up demand for electricity.
Natural gas futures were trading up 1.4% on Wednesday, to $ 3.93 per million U.K. thermal units, on track for their fourth straight day of gains. Natural gas has jumped more than 53% since the start of the year and 130% over the past year. Prices returned to the levels they were trading at in December 2018, when gas was last trading above $ 4.
But lately, the inventories of natural gas producers have been deflated. They certainly don’t get the same boost as the product. In fact, industry leaders like
Cabot Oil and Gas
(symbol: COG) and
EQT
(EQT) have been roughly flat over the past two months, a period in which month one gas futures have risen by a third.
John Gerdes, who 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 basis of the price of contracts at longer term. While futures contracts expiring in the next few months can fluctuate based on short-term dynamics like the weather, equity investors are more concerned with what the market might look like in 18 months or more, given that companies will eventually have to deal with a more normalized pricing environment, he said.
Futures contracts expiring in April 2023, for example, trade at $ 2.69. “Gas inventories have been pretty well anchored in that $ 2.60 to $ 2.70 range,” Gerdes said. “They haven’t gone down that much, they haven’t gone down that much.”
In the short term, the prices are being pushed up by the hot weather which pushes more and more people to use their air conditioners. Natural gas is the largest source of electricity in the United States today. And supply failed to catch up with demand, leading to lower inventories in the United States
Higher prices can encourage producers to extract more gas and consumers to consume less in the short term. But natural gas is also trading on a longer-term dynamic, 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 currently a debate as to whether natural gas is a “transitional fuel” that can help the United States reduce its carbon emissions, or whether it should be quickly phased out in favor of the United States. renewable energies. If natural gas is seen as a key component of power generation in the decades to come, producers could experience years of growth. But more aggressive climate policies could mean phasing out gas much sooner.
Nevertheless, Gerdes believes that there are now opportunities in the stocks. He expects natural gas prices to eventually settle above what stock prices currently imply, with a break-even price around $ 2.80 or $ 2.90 over the course of the year. the next two years. The companies that he believes are trading at the greatest discount to their implied value at these gas price levels are
South West Energy
(SWN), EQT and
Antero Resources
(WITH).
Write to Avi Salzman at [email protected]
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