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Natural gas prices ended roughly flat on the week
Natural gas spot prices closed at $3.64 per MMBtu (millions of British thermal units) on July 12—up $0.02 from the prior week, when it closed at $3.62 per MMBtu. Though natural gas prices increased slightly last week, they’re down significantly since late May, when they hit ~$4.25 per MMBtu. Lower natural gas prices are a negative catalyst for energy stocks—especially domestic independent upstream names whose production largely includes natural gas such as Chesapeake Energy (CHK), Southwestern Energy (SWN), Comstock Resources (CRK), and Quicksilver Resources (KWK). Lower natural gas price movement is also negative for the U.S. Natural Gas Fund (UNG), an exchange-traded fund designed to track the price of Henry Hub natural gas (the standard benchmark for domestic natural gas prices). Natural gas this week was neither helped nor hurt by an inventory build in line with expectations. Please see Why natural gas prices remain depressed, with no help from storage report.
Strong price momentum earlier in the year, but natural gas gave up much of its gains due to bearish (negative) inventory reports
From February to April, natural gas prices experienced a strong rally, increasing from ~$3.15 per MMBtu to peak out at ~$4.40 per MMBtu, as colder-than-normal weather drove stronger demand and larger-than-normal inventory draws (for more on this, please see Continued cold weather in early April lifted natural gas prices). However, throughout May and June, natural gas prices slid because in many weeks, reported inventory figures were more bearish than expected. In recent weeks, natural gas has largely been range-bound around $3.60 per MMBtu to $3.80 per MMBtu.
Natural gas prices are low from a long-term perspective
From a long-term historical perspective, natural gas has been trading at low levels over the past few years. Prior to the financial crisis of 2008, natural gas had reached peaks of over $15.00 per MMBtu. Since 2008, 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 United States. Many investors expect natural gas prices to remain relatively depressed, as the development of shale resources has allowed natural gas to be produced economically at lower prices.
For companies weighted towards natural gas assets and production, prices have an important effect on valuation
Market participants and upstream energy companies monitor natural gas prices because lower prices translate into lower revenues—and therefore lower margins and valuation for natural gas producers. The chart below shows natural gas prices plotted against CHK’s and KWK’s stock prices over time on a percentage change basis. It appears that the companies’ valuation has tracked the price of natural gas quite closely.
This past week, natural gas prices were roughly flat, which was a neutral short-term catalyst. However, natural gas still remains close to 2013 lows, as prices slid throughout May and June. Lastly, from a wider long-term perspective (five years and longer), natural gas prices are relatively low. Fluctuations in natural gas prices most affect natural gas–weighted producers, such as the companies mentioned above (CHK, SWN, CRK, and KWK), and the U.S. Natural Gas Fund ETF (UNG). Investors with such holdings find it prudent to track the price of natural gas.
© 2013 Market Realist, Inc.