Natural gas prices continue rally, positive for some upstream energy names

2013.01.23 - Natural Gas LT v2Enlarge GraphNatural gas spot prices closed at $3.55/MMBtu (millions of British thermal units) on 1/23/13, up $0.12 from the prior week. Higher natural gas prices are a positive 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). Bullish natural gas price movement is also positive 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).

Natural gas prices have 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.

Enlarge GraphHowever, 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.

Enlarge Graph

Market participants and upstream energy companies monitor natural gas prices as higher prices translate into higher revenues, and therefore higher margins and valuation for natural gas producers. Last week saw a move up in prices, which is a positive catalyst. Investors should note, however, that many believe the potential for natural gas prices to appreciate is limited given vast supplies of shale gas that can be economically developed low prices.