Europe has just won the first part of its winter war, with warmer-than-expected weather helping the continent to avoid a full-blown energy and gas crisis. The region has just crossed the halfway point of its heating quarter, and even though wintry conditions have returned to the continent after a record-warm start to the year, it should have enough gas in storage to avert the worst-case scenario: running out of gas during winter.
Indeed, Gas Infrastructure Europe (GIE) says that gas storage in Europe is is just below 80% full, ahead of the five-year seasonal average of 70%. According to GIE, EU gas inventories were 89.17 billion cubic meters (bcm) on 22 January; a w/w fall of 4.22bcm, but still 23.4bcm higher than the 2018-22 five-year average, and 40.6bcm higher y/y.
Unfortunately, for natural gas bulls, traders have taken these developments as a green light to sell: wholesale price of natural gas in Europe falling to a 17-month low of $60 per megawatt hour, more than 80% lower from a peak of nearly $382 per MWh in late August. Meanwhile, German wholesale one-year forward electricity prices, a regional benchmark, have crashed to 150 euros from a peak of almost 1,000 euros six months ago.
Even more alarming, the natural gas outlook is not exactly exhilarating. Energy analysts at Bespoke Investment Group have made an interesting observation in an article titled Bad Gas. They warn that “…if natural gas rallies 100% in 100 days, you probably want to avoid it”.
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“In the eight prior periods when the commodity rallied 100% in 100 days, its median performance over the following year was a decline of 30.1% with declines 75% of the time. Conversely, the performance of natural gas following 50%+ declines in 100 days hasn’t been as consistent. In the five prior periods that fit that criteria, natural gas was up by a median of just 1.4% with gains three out of five times,” the report continues.
With the current selloff coming just eight months after the second-strongest 100-trading day rally in the history of the futures contract (+147%), the odds appear to be decidedly in favor of the bears.
Cheap Gas Stocks
Not surprisingly, it has become more profitable to short natural gas equities than bet on them: the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD) boasts an year-to-date return of 82.6%, incomparable to -54.3% return by the ProShares Ultra Bloomberg Natural Gas ETF (BOIL). KOLD is an inverse ETF that provides daily -2x exposure to an index that tracks natural gas by holding one second month futures contract at a time while BOIL provides 2x the daily return of an index that measures the price performance of natural gas as reflected through publicly traded natural gas futures contracts.
That said, contrarian investors will be delighted to know that there’s no shortage of natural gas bargains in the space. Here are a few.
- Diamondback Energy
Market Cap: $33.3B
P/E (FWD): 6.24
YTD Returns: 14.9%
Diamondback Energy (NASDAQ: FANG) is a Midland, Texas-based independent oil and natural gas company that specializes in drilling unconventional and onshore oil and natural gas reserves in the Permian Basin in West Texas.
Two weeks ago, analysts at Mizuho advised investors to keep the faith in the energy sector, but also cautioned them to be picky. The analysts initiated coverage on FANG with a Buy rating and a price target of $195, good for nearly 30% upside to current price. The experts note that Diamondback has focused on low-cost operations since its inception, which has enabled it to become a successful consolidator in the basin. They say that the company’s "low-cost advantage should continue to shine through."
Diamondback Energy, Inc. will report Q4 2022 earnings on 02/21/2023 after the market closes. According to Zacks Investment Research, based on 12 analysts' forecasts, the consensus EPS forecast for the quarter is $5.54, good for 52.6% Y/Y growth.
- Pioneer Natural Resources Company
Market Cap: $55.7B
P/E (FWD): 7.59
YTD Returns: 6.4%
Pioneer Natural Resources Company (NYSE: PXD) is an Irving, Texas independent oil and gas exploration producer that produces oil, natural gas liquids (NGLs) and natural gas.
The company recently revealed in its latest 8-K filing that Winter Storm Elliott knocked ~4.5K bbl/day of oil and 8.5K boe/day from its expected Q4 production in the Permian Basin. The company now expects to report Q4 average output of 351K bbl/day of oil and 662K boe/day, adding that production was fully restored by the end of December.
But that does not seem to have discouraged traders, with 49 hedge funds still long on Pioneer Natural Resources according to Insider Monkey’s third quarter database. A big reason why they love PXD: the company has pledged to return a large majority of free cash flow to share owners through dividends and stock buybacks. It has also ended its hedging program so as to give share owners more earnings and dividend potential if oil and gas prices rise in the future.
Pioneer Natural Resources Company will report Q4 2022 earnings on 02/22/2023 after the market closes. According to Zacks Investment Research, based on 11 analysts' forecasts, the consensus EPS forecast for the quarter is $5.94, good for 29.7% Y/Y growth.
- EQT Corp.
Market Cap: $12.1B
P/E (FWD): 9.42
YTD Returns: 3.5%
Pittsburgh, Pennsylvania-based EQT Corporation (NYSE: EQT) is the largest natural gas producer in the United States with ~25.0 trillion cubic feet of proved natural gas, natural gas liquids, and crude oil reserves across approximately 2.0 million gross acres.
EQT is not content with just being a lumbering gas giant, but has been expanding via acquisitions: in the third quarter, the company announced a $5.2 billion purchase of natural gas producer THQ Appalachia I LLC as well as associated pipeline assets of XcL Midstream in the biggest M&A deal for the quarter. THQ Appalachia, which is owned by privately held gas producer Tug Hill Operating. EQT said the assets acquired include ~90K core net acres offsetting its existing core leasehold in West Virginia, producing 800M cfe/day and expected to generate free cash flow at average natural gas prices above ~$1.35/MMBtu over the next five years. The company also doubled its buyback program to $2B, and said it is increasing its year-end 2023 debt reduction goal to $4B from $2.5B.
Last year, EQT unveiled a plan centered on producing more liquified natural gas by dramatically increasing natural gas drilling in Appalachia and around the country's shale basins, as well as pipeline and export terminal capacity, which it said would not only boost United States energy security, but also help break the global reliance on coal and on countries like Russia and Iran. Its latest acquisition will, therefore, help the company meet its goal. EQT shares nearly doubled in 2022.
EQT Corporation is expected to report Q4 2022 earnings on 02/15/2023 after the market closes. According to Zacks Investment Research, based on 13 analysts' forecasts, the consensus EPS forecast for the quarter is $0.88, representing a robust 115% Y/Y increase.
By Alex Kimani for Oilprice.com
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