Investors are suddenly finding value in beaten down natural gas stocks as crude oil prices hit new lows, in what might signal a bottom for gas drillers.
Natural gas drilling has been very attractive to investors for a while, but it’s all relative. And right now, it’s relative to sinking crude oil.
During the past week, when crude oil prices and crude oil companies were hitting new lows, investors started accumulating stocks of natural gas drillers. A handful of beaten down gas drillers saw new buying, indicating that investors are actually finding value in these stocks.
By the end of the week, crude oil prices bounced back a bit, but this was likely more of a respite from short covering due to deeply oversold markets. Importantly, natural gas companies bottomed out before the bounce in crude oil. This could signal a bottom for gas drillers.
The STEO by the EIA forecasts crude oil to trade up to $40/barrel till January 2017. The average price in December 2015 was $37/bbl, therefore, in 2016, only a small increase of 8 percent is projected. Only later in 2017 are prices are expected to rise. Related: Security Woes Threaten OPEC’s Second Largest Producer
Most of the companies were unprepared for this kind of a fall in crude oil prices. With an extended period of low crude oil prices, many will not survive this downturn. The relatively stronger companies will also have to innovate and cut costs to remain in the business.
The forecast for natural gas is a bit more exciting. From the end of last year to the end of 2016, the price is expected to rise from $1.93 to $3.08/million Btu, which is an increase of almost 59 percent. Considering the upturn in prices, natural gas companies are expected to perform better.
Comparing the two charts below, there is a clear distinction. Natural gas prices are broadly in a range of $2-$4. As the natural gas companies have faced low prices before, both in 2009 and again in 2012, they are better equipped to handle this downturn. Related: Oil Prices in 2016 Will Be Determined By These 6 Factors
Source: markets.ft.com
(Click to enlarge) Related: 60 Reasons Why Oil Investors Should Hang On
On the other hand, crude oil prices remained relatively high until the decline, which started in late 2014. Most of the new investment in crude oil came in expecting a price of $70/barrel or more, and it is unlikely that these companies will be able to honor their debt, a fact that is leadng to a crash in the junk bond market. That said, a few companies will innovate and survive this downturn, and others are likely to wind up their operations.
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Natural gas prices are at the lower end of the range and have still not dipped to new lows. With the cold weather predicted to stick around, prices are likely to head up rather than down. However, last week, crude oil prices dipped just below $28/bbl, a level last seen in 2004, before bouncing back at the end of the week to $32/bbl. But while oil companies will have to get really creative here, natural gas drillers have already adapted their operations to low prices.
At the end of the day, it looks like natural gas stocks will bottom out before oil.
By Rakesh Upadhyay for Oilprice.com
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