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Natural gas shortages and growing demand are causing an energy crisis that has now spread around the world. Buy shares of oil companies like Exxon Mobil (XOM), Royal Dutch Shell (RDS.A) and
Marathon Oil
(MRO) to bet on the rise of natural gas.
Natural gas prices hit new highs this week, with European and Asian prices breaking all-time highs of over $ 30 per million British thermal units. In the United States, prices recently hit intraday highs above $ 6 per mBtu, the highest level since 2014.
The simple way to play on higher natural gas prices is to buy from natural gas producers in the United States, the country that now produces the most natural gas in the world. But there is a problem with this strategy. Most US gas producers have hedged all or most of their 2021 production at much lower prices, meaning they are not benefiting from the latest price hike. In fact, the best producers love
EQT
(ticker: EQT) and
CNX Resources
(CNX) even covered most of their 2022 production, according to estimates by Truist analyst Neal Dingmann.
In general, gas companies have used financial derivative instruments to lock in prices months ago, so the latest price spike probably won’t help them, Dingmann said in an interview.
“All covers, even for next year, are well under $ 3,” Dingmann said.
There are a few gas producers who have not covered themselves as much.
Cabot Oil and Gas
(COG), for example, did not cover 2022 production on its second-quarter conference call. And
Chesapeake Energy
(CHK) has light hurdles, Dingmann said.
But there is another way to play the natural gas boom. American shale drillers best known for oil production often pump a considerable amount of gas as well. Historically, gas has been a very small part of their income, as gas prices have been extremely low for years. Dingmann expects third-quarter earnings reports to show gas now accounts for a larger share of oil producers’ revenues.
“You go back a year and the comment from a lot of those same companies was that gas is down but that doesn’t really matter, because even though it’s a third of our weighting it doesn’t currently produce. that 5% of our income, “he said.” All of a sudden, however, you go from $ 3 to $ 5 of gasoline or propane which has quadrupled. people still thought about those third trimester calls in November. ”
Investors “are going to be very surprised” at what these companies are getting from the gas, he said. Friday,
Exxon Mobil
(XOM) said in a securities filing that it expects higher gas prices to add $ 500 million to $ 900 million in profit to its third quarter report above second quarter numbers. This is even more than he expects to do with the rise in oil prices.
Dingmann expects several oil companies to profit from this phenomenon. Majors like Exxon and
Royal Dutch Shell
(RDS.B) do not tend to hedge their gas production, so they will reap big benefits from higher prices. Others like
Continental resources
(CLR) also kept their hurdles light, Dingmann notes. Continental’s production is 52% oil and 48% gas, and only about 5% of its gas production was hedged in 2022, according to Dingmann. He also waits
Marathon Oil
(MRO) to benefit from it, since 49% of its production is gas.
Oil companies could benefit from the gas surge in other ways as well. Some utilities will likely switch their fuel to oil due to soaring gas prices, Daniel Yergin, IHS Markit vice president, said in an interview with Barron’s. This change is “part of the reason oil is rising,” Yergin said. “We believe that about 600,000 barrels of additional demand for oil comes from the need to generate electricity.”
Having said that, a big bet on natural gas is dangerous now because the product is already at such high levels and governments can take more drastic steps to bring the prices down so it doesn’t hurt consumers.
Rebecca Babin, senior energy trader at CIBC Private Wealth Management, said in an interview that investors shouldn’t expect high prices to last. Already, local authorities in China have pushed factories to operate on shortened schedules and European power companies are starting to collapse.
“I feel like it’s not sustainable,” she said. “You are going to see an aggressive destruction and rationing of demand. “
Write to Avi Salzman at [email protected]
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