Natural gas fell last week, bearish for nat gas stocks

2013.02.11 - Nat Gas vs CHK vs KWKEnlarge GraphNatural gas spot prices closed at $3.27/MMBtu (millions of British thermal units) on 2/8/13, down $0.03 from the prior week. This is the third week in a row that natural gas prices closed lower, as the commodity was trading at $3.57/MMBtu on January 18. Lower natural gas prices are a negative catalyst for energy stocks, especially domestic independent upstream names with a large proportion of production comprised of natural gas such as Chesapeake Energy (CHK), Southwestern Energy (SWN), Comstock Resources (CRK), and Quicksilver Resources (KWK). Bearish natural gas price movement is also negative for the US Natural Gas Fund (UNG), an ETF designed to track the price of Henry Hub natural gas (the standard benchmark for domestic natural gas prices).

Despite the slide in prices in the last few weeks, natural gas prices had experienced upward momentum since 2Q12 lows (see chart below), with possible factors being announced supply cuts by producers, a hotter than normal summer, coal-to-gas switching, and now expectations of cold weather this winter.

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However, in the context of a longer time frame (see chart below), natural gas is still near historic lows. Over the past several years, a large amount of natural gas supply has come online without an equivalent increase in demand due to the discovery and development of large natural gas shale resources in the US. Many expect natural gas prices to remain relatively depressed as the development of the shale resources has allowed natural gas to be produced economically at lower prices.

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Market participants and upstream energy companies monitor natural gas prices as lower prices translate into lower revenues, and therefore lower margins and valuation for natural gas producers. The below chart shows natural gas prices plotted against CHK’s and KWK’s stock price over time on a percentage change basis, and it appears that the companies’ valuation has tracked the price of natural gas quite closely.

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Again, last week’s continued movement down in natural gas prices was a negative catalyst. This most affects natural gas weighted producers such as the ones mentioned above (CHK, SWN, CRK, and KWK) and the US Natural Gas Fund ETF (UNG) and investors with such holdings find it prudent to track the price of natural gas.