price peaks
price peaks
If you expect natgas strip prices to peak in Nov, should we assume that the prices on your natgas faves (crk, ar, etc) will also plateau in Nov?
Re: price peaks
The short answer is "No". Here is the long answer.
All of my valuation models are currently based on the NYMEX futures prices for Henry Hub natural gas prices averaging $4.75/MMBtu in Q4 and the futures prices averaging $3.50/MMBtu in 2022. Those gas price assumptions now look too conservative. As I discuss in my Saturday podcast, the Q4 futures prices now sit at $5.58/MMBtu and the 2022 average is $4.32/MMBtu. If these turn out to be the actual prices, all of valuations for the gassers will go higher.
If we have a cold December, I think we may see Q1 futures go over $10.00 because the bidding war is going to get intense. The supply/demand fundamentals look as supportive for gas prices as they did in 2005 and 2008 when natural gas prices spiked to over $13.00. The situation in Europe adds another big layer of demand that we didn't have even five years ago.
I also think NGL prices might end up being much higher than what I am using in the models. Propane prices at Mt. Belvieu, Texas are $63/bbl today, which compares to less than $10/bbl at this time last year. There is a SERIOUS shortage of propane in the U.S. that will not get fixed before winter.
Plus, with the deficit in U.S. natural gas storage we are sure to see significant regional price spikes for natural gas. Gas shortages in highly populated regions have the potential to take all of the gassers "realized prices" MUCH higher than what I have in the models. For example, even though AR had 92% of their Q1 2021 gas hedged at $2.77/MMBtu their Q1 "realized" gas price for the quarter was $3.56/mcf because of the big spot market spikes in February.
I have seen several winter forecasts that show the Great Lakes Region is going to have a colder than normal winter. That area of the country burns a lot of natural gas for space heating. Watch Joe's Saturday Summary weather forecast here: https://www.weatherbell.com/premium/
Also, my valuations are based on a reasonable valuation multiple of annualized operating cash flow per share. To "annualize CFPS" I take 2X the current year + 1X the next year's CFPS divided by 3. So, when we get to 2022 my valuations will be going up for all of the gassers in our Sweet 16 because they will have more production that is unhedged in 2022 and 2023.
For example, if everything plays out for Antero Resources (AR) and natural gas prices do average $4.32/MMBtu in 2022 my valuation should go to $34/share in Q1 2022. Plus, the vast improvement in AR's balance sheet deserves a higher valuation multiple. My current $27.00 valuation is just 5X annualized CFPS. With all their running room (i.e. lots of high value development drilling locations) AR should have a 12-month price target of 6X CFPS, which will be $41/share.
As I discussed in the podcast, the global shortage of natural gas will impact U.S. natural gas and NGL prices more than it has in the past. I now think there has been a Structural Change in the global gas market. More and more countries are going to natural gas fired power plants to replace coal and also because wind and solar are so unreliable. There will be more "pull" on exports of U.S. gas and the U.S. is adding more export capacity each year.
All of my valuation models are currently based on the NYMEX futures prices for Henry Hub natural gas prices averaging $4.75/MMBtu in Q4 and the futures prices averaging $3.50/MMBtu in 2022. Those gas price assumptions now look too conservative. As I discuss in my Saturday podcast, the Q4 futures prices now sit at $5.58/MMBtu and the 2022 average is $4.32/MMBtu. If these turn out to be the actual prices, all of valuations for the gassers will go higher.
If we have a cold December, I think we may see Q1 futures go over $10.00 because the bidding war is going to get intense. The supply/demand fundamentals look as supportive for gas prices as they did in 2005 and 2008 when natural gas prices spiked to over $13.00. The situation in Europe adds another big layer of demand that we didn't have even five years ago.
I also think NGL prices might end up being much higher than what I am using in the models. Propane prices at Mt. Belvieu, Texas are $63/bbl today, which compares to less than $10/bbl at this time last year. There is a SERIOUS shortage of propane in the U.S. that will not get fixed before winter.
Plus, with the deficit in U.S. natural gas storage we are sure to see significant regional price spikes for natural gas. Gas shortages in highly populated regions have the potential to take all of the gassers "realized prices" MUCH higher than what I have in the models. For example, even though AR had 92% of their Q1 2021 gas hedged at $2.77/MMBtu their Q1 "realized" gas price for the quarter was $3.56/mcf because of the big spot market spikes in February.
I have seen several winter forecasts that show the Great Lakes Region is going to have a colder than normal winter. That area of the country burns a lot of natural gas for space heating. Watch Joe's Saturday Summary weather forecast here: https://www.weatherbell.com/premium/
Also, my valuations are based on a reasonable valuation multiple of annualized operating cash flow per share. To "annualize CFPS" I take 2X the current year + 1X the next year's CFPS divided by 3. So, when we get to 2022 my valuations will be going up for all of the gassers in our Sweet 16 because they will have more production that is unhedged in 2022 and 2023.
For example, if everything plays out for Antero Resources (AR) and natural gas prices do average $4.32/MMBtu in 2022 my valuation should go to $34/share in Q1 2022. Plus, the vast improvement in AR's balance sheet deserves a higher valuation multiple. My current $27.00 valuation is just 5X annualized CFPS. With all their running room (i.e. lots of high value development drilling locations) AR should have a 12-month price target of 6X CFPS, which will be $41/share.
As I discussed in the podcast, the global shortage of natural gas will impact U.S. natural gas and NGL prices more than it has in the past. I now think there has been a Structural Change in the global gas market. More and more countries are going to natural gas fired power plants to replace coal and also because wind and solar are so unreliable. There will be more "pull" on exports of U.S. gas and the U.S. is adding more export capacity each year.
Last edited by dan_s on Sun Oct 03, 2021 1:02 pm, edited 1 time in total.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: price peaks
Thx for the detailed explanation.