Natural gas stocks should benefit from stronger nat gas prices by the fourth quarter of this year
Capital Ideas Media | May 29, 2020 | SmallCapPower: Capital Ideas Media Publisher Mark Bunting wrote: Mackie Research released a report that argues natural gas will see much stronger prices by the fourth quarter of this year as inventories play catch up to a world economy that will begin to emerge from the COVID-19 shutdown and normalize.
(Originally published on Capital Ideas Media on April 28, 2020)
When that happens, analyst Bill Newman believes that there will be limited available capital to fund drilling programs to restore and replenish gas production and inventories.
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Many natural gas levered stocks like Tourmaline (TSX:TOU) have already bounced nicely off their March lows but these ideas will take some patience and a bit of courage as the carnage in the oil market drowns out the potential for some longer term gains.
Here are the hi-lights of the report followed by five natural gas weighted companies that could be well positioned to capitalize:
Over 40% of total U.S. natural gas production is classified as “associated gas” which is simply natural gas that is produced as a by-product from a shale oil well.
Even before the impact of COVID-19, U.S. shale oil production had already begun to wane, reaching a peak rate of approximately 9.1 million barrels per day (MMbbl/d) in November 2019, before declining to 8.9 MMbbl/d in February 2020.
ACTIVE RIG COUNT – US AND CANADA
Source: Bloomberg, Baker Hughes, Mackie Research Capital
“There should be increased demand for U.S. natural gas as world economies begin to normalize. We expect much stronger natural gas prices in Q4/2020 and through 2021.” – Mackie Research
Natural gas production in the lower 48 states has also declined, from approximately 94.5 billion cubic feet (Bcf/d) in January 2020 to approximately 93 Bcf/d currently.
The rollover in U.S. production reflects a significant reduction in available capital provided by institutions demanding investment return over pure production growth.
With the outbreak of COVID-19 and the following near shut down of the world economies, oil demand has dropped by an estimated 25 MMbbl/d to 30 MMbbl/d or 25 to 30%.
Even with the recent pledge by OPEC + to cut 9.7 MMbbl/d and the expected production shut-ins from other non-OPEC countries, crude inventories are filling fast.
With the collapse in the price of oil, production shut-ins have already begun and should accelerate if U.S. inventories fill.
In the near-term U.S. oil shut-ins could total 2 to 4 MMbbl/d cutting natural gas supply by 4 to 8 Bcf/d. As demand returns as world economies begin to emerge from hibernation, it will take some time and significant capital to rebuild production.
In the near term, much of the excess oil demand will be met with draws from inventories, however, natural gas inventories will still need to be replenished for the upcoming winter heating season.
Although demand for natural gas is also expected to be significantly below norms through the second half of 2020, supply could be hit harder, and there will be limited available capital to fund drilling programs to restore and replenish gas production and inventories.
Additionally, U.S. LNG export capacity more than doubled in 2019 to 8.9 Bcf/d.
CHANGE IN CRUDE OIL, GASOLINE, DISTILLATE AND NATURAL GAS INVENTORIES
Source: Bloomberg, Mackie Research Capital
This should result in increased demand for U.S. natural gas as world economies begin to normalize.
We expect much stronger natural gas prices in Q4/2020 and through 2021.
We forecast an average NYMEX natural gas price of $2.20 million BTU (MMBtu) (U.S.) in 2020 increasing to $2.80/MMBtu in 2021.
Strategy: Short-term Play Is on Gas, Oil Looks Better in the Long-Term.
The short-term outlook for oil remains weak and with near full inventories, prices could be capped heading into 2021.
However, as demand normalizes, inventories could be drawn down quickly and with new supply lagging, oil prices should bounce back.
In the short-term we believe natural gas weighted stocks are a better play.
We expect near-term price support as inventories are replenished and the potential for price spikes with the onset of cold weather.
We highlight natural gas weighted producers that could benefit from stronger natural gas prices.
CANADIAN NATURAL GAS WEIGHTED PRODUCERS
Source: Bloomberg, Mackie Research Capital
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