Receive e-mail alerts for new research on CHK:
Interested in CHK?
Don’t miss the next report.
Natural gas prices are especially affected during the winter as many households use natural gas for home heating. Warmer weather translates into less natural gas demand and, therefore, lower prices. Conversely, colder weather translates into more natural gas demand and higher prices. Natural gas prices affect the earnings of major domestic natural gas producers, such as Chesapeake Energy (CHK), Range Resources (RRC), Quicksilver Resources (KWK), and Southwestern Energy (SWN). Additionally, many of these companies are part of the energy ETFs, such as the Vanguard Energy ETF (VDE).
For the week ending April 6th, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 126 versus the normal figure for corresponding weeks past of 113. Heating degree days (HDD) are a measure of how much colder than room temperature the weather is, and the greater the HDD figure, the colder it is. This week’s HDD figure was higher than normal, meaning weather was colder than normal, which implies more natural gas demand and, therefore, higher natural gas prices. Natural gas prices closed at $4.13/MMBtu (millions of British thermal units) on April 5th, continuing an extended rally that began in mid-February when prices bottomed out at $3.15/MMBtu. Natural gas prices rose largely due to colder than normal weather.
The top graph displays weekly heating degree day data for this winter compared to a normal winter. As one can see, this week’s figure lies above the normal trendline.
The graph above displays cumulative heating degree days from the start of the heating season. This week was colder than normal, and six out of seven of the prior weeks were also colder than normal. The winter as a whole thus far has generally been warmer than normal which muted natural gas earlier in the season, however, the recent colder than normal weather has resulted in this heating season being close to normal as measured in heating degree days.
Theoretically, higher demand translates into higher natural gas prices, which affects the earnings and valuations of natural gas weighted producers. The below graph displays natural gas prices over time versus the stock prices of CHK and KWK, two producers whose production is currently weighted towards natural gas. Over the past few years, the equity prices of these companies have trended with natural gas prices.
Investors with holdings in natural gas weighted producers (such as CHK, KWK, RRC, and SWN) or a natural gas ETF such as UNG may find it prudent to be aware of weather as an indicator of natural gas demand and, therefore, price. As stated, for the past six out of seven weeks temperatures have been colder than normal and this has resulted in a positive medium-term catalyst for natural gas.
© 2013 Market Realist, Inc.