Natural Gas’s Rise: Why Gas-Weighted Stocks Are Underperforming
Natural gas–weighted stocks and natural gas
Between March 20, 2017, and March 27, 2017, natural gas futures contracts for May 2017 rose 1%. The commodity saw the small gain due to slightly bullish inventory data.
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An equal-weighted basket of natural gas–weighted stocks rose 0.4% during the same period. These stocks operate with production mixes of at least 60.0% in natural gas (UNG) (GASX) (FCG) (GASL). They’re also part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Best and worst natural gas stocks
The natural gas–weighted stocks that outperformed their peers from March 20, 2017, to March 27, 2017, included the following:
These stocks also outperformed natural gas. Rice Energy and Cabot Oil & Gas have high correlations with natural gas, as we discussed in Part Three of this series.
The stocks that underperformed their peers during the period included the following:
These stocks also underperformed natural gas. As we saw in the previous article, CHK has one of the lowest correlations with natural gas.
Apart from their correlations with natural gas in the short term and their earnings in the long term, the performances of these natural gas–weighted stocks could also be affected by movements in crude oil (USO) (UCO) prices. Crude oil prices can drive the sentiment of the entire energy sector, not just crude oil stocks. Crude oil fell 3.2% in the trailing week.
Natural gas–weighted stocks and natural gas since 2016 lows
On March 3, 2016, natural gas futures touched a 17-year low of $1.64. From March 3, 2016, to March 27, 2017, natural gas (UNG) (BOIL) (UGAZ) (FCG) rose 90.9% on a closing-price basis. Our equal-weighted basket of upstream stocks rose 26.9% during the same period.
The weaker rise in natural gas–weighted stocks compared to natural gas could be attributed to the weaker positions of some of these natural gas–heavy companies due to chronically low natural gas prices over the last few years. They’re also likely pricing in weaker natural gas prices in the future due to rising natural gas production despite weak prices.
On March 3, 2016, the following natural gas–weighted stocks were among the outperformers:
The following natural gas–weighted stocks didn’t fare as well during the period:
So, natural gas–weighted stocks have underperformed natural gas in the trailing week and since the commodity’s low in March 2016. We’ll have to wait and see if the trend continues, particularly as natural gas struggles to hold on to recent gains as winter heating demand winds down.