U.S. Natural Gas Market is MUCH TIGHTER

[dan_s]

As I have been telling you for months in my weekly podcasts ......

E&P: Natural Gas Heating Up a special report from Wells Fargo Equity Research team on April 12, 2017

Summary. We continue to remain bullish on the summer outlook for natural
gas. Recent data points continue to indicate tightening supply/demand
fundamentals, providing further support to our natural gas price forecast of
$3.40/MMBtu on average for the remainder of 2017, which is 9% above
consensus estimates and highest on the Street. So despite the recent rally in
natural gas prices, we believe the trade has additional room to run. Given our
favorable outlook, we continue to favor Outperform rated Cabot Oil and Gas
(COG) and Rice Energy (RICE) as well as Market Perform rated Range Resources
(RRC), Southwestern Energy (SWN) and Chesapeake Energy (CHK).

Data Indicating Undersupply Persists... The 3 most recent weekly storage
data points have shown that the 2 Bcf/d of undersupply (which was the weather
adjusted average this winter) is persisting. This is further backed up by recent
data from Bentek which shows April U.S. production month-to-date is down 2.4
Bcf/d versus the same period in 2016, while demand (ex-res/comm, which is
heavily influenced by weather) is down just 0.6 Bcf/d. After adjusting for slightly
weaker imports from Canada and LNG, the supply/demand balance is 2.1 Bcf/d
tighter year-over-year.

Which Necessitates Higher Prices To Fill Storage. Our analysis
indicates that the supply deficit will persist throughout injection season, and this
deficit is incorporated into our storage forecast. As we detail within, in order to
finish the injection season at our forecast of just 3.8 Tcf, which is below historical
levels, higher prices are necessary in order to destroy demand. When compared
with last year, we view stronger industrial demand (+0.9 Bcf/d), exports to
Mexico (+0.8 Bcf/d), and LNG demand (+1.4 Bcf/d) mostly offsetting a modest
supply increase (+0.4 Bcf/d) and weaker power demand (-3.5 Bcf/d).

Gas-Focused Group Cheap vs. Strip. The group is currently discounting an
adjusted natural gas price of $2.74, versus the 12-month Strip at $3.37 and our
forecast at $3.40 for the remainder of this year. We view the relationship
between the natural gas price that stocks are discounting versus the strip, among
the most favorable that we’ve seen since the beginning of 2016.

Select Names Provide Beta. We ran several screens to identify which natural
gas-focused operators in our coverage have the most near-term upside potential.
We screened for cash flow upside for the remainder of 2017 (2Q-4Q) to higher gas
prices as well as trading beta versus the 6-month NYMEX strip. We found that
Outperform rated Cabot Oil and Gas (COG, $24.45) and Rice Energy (RICE, $23)
as well as Market Perform rated Range Resources (RRC, $28.54), Southwestern
Energy (SWN, $7.87) and Chesapeake Energy (CHK, $6.15) held the best
combination of cash flow upside and trading beta to higher natural gas prices.
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IMO AR, GPOR and RRC are "SCREAMING BUYS" at their current share prices. RRC is the safest bet. - Dan

[dan_s]

If you would like to read the 14 page Wells Fargo report on natural gas, send me an e-mail and I will forward it to you. E-mail dmsteffens@comcast.net