JPMorgan on upstream stocks
On December 7, JPMorgan Chase (JPM) cut Chesapeake Energy (CHK) from a “neutral” to an “underweight” rating. On the same day, JPM reduced its price target on Gulfport Energy (GPOR) to $8 from $11. JPM also reduced its price target on EQT Corporation to $24 from $50.
Natural gas is a significant source of revenue
Natural gas is a significant source of revenue for these three upstream stocks. GPOR operates with a production mix of 89% in natural gas, while natural gas constitutes ~46.7% of the revenue in CHK’s upstream business. EQT derives 89% of its top line from natural gas.
Will trade based on buying natural gas and selling oil unwind?
With the production cut agreement that’s set to be implemented in 2019, US crude oil’s downside is limited. However, the recent flow of funds from oil to the natural gas market might be stopped, which could drag natural gas prices down further.
Last week, US crude oil January futures rose 3.3%, while natural gas January futures fell 3.1%. Moreover, last month, US crude oil prices fell 22%, while natural gas futures rose 41.4%. Oversupply concerns also played an important role in oil’s fall.