TPH: Natural Gas Stock Thoughts 1-28-2019
Cautious and defensive on gas exposure
Our forecast has associated gas growing by nearly 8bcfd over the next 3 years, meaning most, if not all, the US demand growth can be satiated by associated volumes. As such, we're taking a cautious stance on gas equities, with a bias towards those best positioned to withstand a multi-year period with gas prices in the $2.50-2.75 range. Until we get greater clarity on the remainder of companies yet to officially announce 2019 plans, our top pick remains EQT as the combination of scale, accelerating FCF earmarked for shareholder returns, and the potential for upside to operational results makes it a good risk reward investment. In Canada, with the AECO market decoupled from Henry Hub, we don't expect the Canadian benchmark to meaningfully weaken, however, those with material exposure to US gas markets may see cash flow come under pressure. We see TOU being most levered to US hubs, but possessing a balance sheet resilient down to $2.50 (2020 D/EBITDA 1.8x at $2.50 flat). Other names with material US gas exposure include: CR, BIR, and ARX while more liquids focused names such as KEL, VII, and NVA sell the majority of their gas to US markets, but derive the bulk of their revenue from the liquids stream.
News for the Gassers
News for the Gassers
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: News for the Gassers
Dan,
Do they specify how much of the 8bcfd is from improved gas capturing from existing oil wells (reduced flaring) vs. new oil well drilling? Trying to understand if TPH oil well drilling plans are a bit optimistic given current oil price.
I'm generally aware of the 3+bcfd associated gas coming out of Permian, but that's designated to go to Mexico on Enbridge pipeline. Also need the other 5bcfd (now) to cover LNG facilities coming on-line in 2019 as you've outlined. So rest should go to Gulf coast to support new facilities coming online.
Generally, it would be interesting to know how they came up with 8bcfd of incremental associated gas estimate if available.
Thx
Dave
Do they specify how much of the 8bcfd is from improved gas capturing from existing oil wells (reduced flaring) vs. new oil well drilling? Trying to understand if TPH oil well drilling plans are a bit optimistic given current oil price.
I'm generally aware of the 3+bcfd associated gas coming out of Permian, but that's designated to go to Mexico on Enbridge pipeline. Also need the other 5bcfd (now) to cover LNG facilities coming on-line in 2019 as you've outlined. So rest should go to Gulf coast to support new facilities coming online.
Generally, it would be interesting to know how they came up with 8bcfd of incremental associated gas estimate if available.
Thx
Dave
Re: News for the Gassers
Read this: https://www.eia.gov/todayinenergy/detail.php?id=38052
EIA’s January 2019 Short-Term Energy Outlook (STEO) expects several U.S. natural gas market trends from 2018 to continue into 2019 and 2020, including relatively stable Henry Hub natural gas prices and increasing natural gas production and exports. According to the STEO, total U.S. natural gas consumption is expected to increase slightly through 2020, with increases in the electric and industrial sectors offsetting decreases in the residential and commercial sectors.
EIA expects the U.S. benchmark Henry Hub natural gas spot price to average $2.89 per million British thermal units (MMBtu) in 2019 and $2.92/MMBtu in 2020, about 25 cents lower than the 2018 average of $3.15/MMBtu. Prices in the forecast are expected to be comparable with recent years as production growth largely keeps pace with demand and export growth. NYMEX trading during the five-day period ending January 10, 2019, suggests that a range of $1.85/MMBtu to $4.80/MMBtu encompasses the market expectation for Henry Hub prices in December 2019 at the 95% confidence level.
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MY TAKE:
> At this point a year ago, EIA said that U.S. natural gas production would exceed demand and depress gas prices. Mother Nature had another idea. Last winter lasted through the first three weeks of April, shortening the "refill season". Then we had a hot summer, which increased demand for power generation. We got to November, 2018 with a BIG deficit in natural gas storage and a cold spell in late November sent the gas price to $4.90/MMBtu.
> Mother Nature will decide where gas prices go again this year. My SWAG is that at the end of March, U.S. natural gas in storage will be under 1,000 BCF or more than 600 BCF below the 5-year average. That will increase demand by 2 BCF per day during the refill season that lasts ~200 days.
> EIA is notorious for under-estimating demand.
> We will see a big increase in "associated gas" coming from Permian, but the timing is probably 2H 2019.
> The last time we had a winter like this (2013-2014): Natural gas prices peaked at more than $5.00/MMBtu in Q1 2014 and fell to under $2.00/MMBtu in early 2016, primarily because of a big surge in associated gas from the Eagle Ford that flooded the Henry Hub.
> The situation at Henry Hub is much different today. We have more pipelines taking Texas gas to Mexico (Embridge has opened a new 2.6 Bcfpd pipeline to Mexico). There has been and will be a BIG INCREASE in LNG exports (Sabine Pass and Corpus Christi).
> U.S. natural gas is the cheapest form of energy on the planet. We are blessed to have an abundant supply. There is HUGE global demand for our gas. BTW the VERY COLD winter in Europe is increasing demand for our gas across the pond.
Deep State: I believe that EIA has an agenda to "calm the market" and keep energy prices low, which does help the economy. My guess is that 99% of EIA employees are hard core believers in global warming, causing them to discount Mother Nature's ability to make a big difference in demand.
EIA’s January 2019 Short-Term Energy Outlook (STEO) expects several U.S. natural gas market trends from 2018 to continue into 2019 and 2020, including relatively stable Henry Hub natural gas prices and increasing natural gas production and exports. According to the STEO, total U.S. natural gas consumption is expected to increase slightly through 2020, with increases in the electric and industrial sectors offsetting decreases in the residential and commercial sectors.
EIA expects the U.S. benchmark Henry Hub natural gas spot price to average $2.89 per million British thermal units (MMBtu) in 2019 and $2.92/MMBtu in 2020, about 25 cents lower than the 2018 average of $3.15/MMBtu. Prices in the forecast are expected to be comparable with recent years as production growth largely keeps pace with demand and export growth. NYMEX trading during the five-day period ending January 10, 2019, suggests that a range of $1.85/MMBtu to $4.80/MMBtu encompasses the market expectation for Henry Hub prices in December 2019 at the 95% confidence level.
----------------------
MY TAKE:
> At this point a year ago, EIA said that U.S. natural gas production would exceed demand and depress gas prices. Mother Nature had another idea. Last winter lasted through the first three weeks of April, shortening the "refill season". Then we had a hot summer, which increased demand for power generation. We got to November, 2018 with a BIG deficit in natural gas storage and a cold spell in late November sent the gas price to $4.90/MMBtu.
> Mother Nature will decide where gas prices go again this year. My SWAG is that at the end of March, U.S. natural gas in storage will be under 1,000 BCF or more than 600 BCF below the 5-year average. That will increase demand by 2 BCF per day during the refill season that lasts ~200 days.
> EIA is notorious for under-estimating demand.
> We will see a big increase in "associated gas" coming from Permian, but the timing is probably 2H 2019.
> The last time we had a winter like this (2013-2014): Natural gas prices peaked at more than $5.00/MMBtu in Q1 2014 and fell to under $2.00/MMBtu in early 2016, primarily because of a big surge in associated gas from the Eagle Ford that flooded the Henry Hub.
> The situation at Henry Hub is much different today. We have more pipelines taking Texas gas to Mexico (Embridge has opened a new 2.6 Bcfpd pipeline to Mexico). There has been and will be a BIG INCREASE in LNG exports (Sabine Pass and Corpus Christi).
> U.S. natural gas is the cheapest form of energy on the planet. We are blessed to have an abundant supply. There is HUGE global demand for our gas. BTW the VERY COLD winter in Europe is increasing demand for our gas across the pond.
Deep State: I believe that EIA has an agenda to "calm the market" and keep energy prices low, which does help the economy. My guess is that 99% of EIA employees are hard core believers in global warming, causing them to discount Mother Nature's ability to make a big difference in demand.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group