The "Gassers": Why are stock prices down?

[dan_s]

I called Range Resources yesterday and had a nice conversation with their IR department manager. Obviously they are getting a lot of calls asking why the share price is going the opposite direction of natural gas prices. Before I start, tomorrow is the last day of trading for the December NYMEX futures contract for natural gas. The January contract will be the "front month" on Thursday, November 29. As I am typing this, the January contract is trading for $4.28/MMBtu. < I think we might see January trade over $5.00/MMBtu before Christmas.

For those of you that don't know: Natural gas trades on "energy content", hence the "MMBtu" vs "Mcf". Like oil, all gas is not the same. "Wet Gas" contains more liquids ("NGLs") and it usually has a higher Btu / energy content. Plus, some companies (CLR for example) report gas production on a "combined basis" where they include NGLs in reported gas volumes. So, they report gas on an "mcfe" basis.

So... why is RRC's share price down, when their production mix is 67.5% natural gas, 29.5% NGLs and only 3.0% crude oil?
Here is what RRC is telling callers
> They believe a lot of hedge funds have dumped all of their upstream oil & gas companies ("throwing the babies out with the bath water"). I agree.
> RRC has ~91% of their Q4 natural gas hedged at ~3.00/MMBtu, so the perception is that they will not get much benefit from the high Q4 gas prices. Basically, this is true but they will get some benefit.
> RRC got a ~$3/bbl increase in realized NGL prices from Q2 to Q3 and they continued to get good NGL prices in October. However, most of their NGLs are tied closer to oil prices than gas prices, so the market thinks lower NGL prices may offset all of the gain from higher gas prices. To some extent this is true.
> About 45% of Range's Q1 gas is unhedged and my guess is that their EPS will almost double from Q4 to Q1.
> Marcellus/Utica gas and NGL pipeline takeaway capacity has increased and commodity price differentials keep coming down, so realized prices should keep drifting higher.
> In addition to the first bullet point, the conclusion that we came to (for the share price decline) is that the Wall Street Gang is only looking at the back end of the NYMEX strip. The consensus is that gas prices will average over $4.00 in Q1, but drop back to under $3.00 in April. The April NYMEX contact is trading at $2.87 today.

MY TAKE:
1. Even if natural gas drops to $2.75 after the winter heating season and stays there FOREVER, Range will still have 2019 revenues over $3 Billion and operating cash flow over $1 Billion.
2. I think Old Man Winter is going to drain natural gas in storage to historic lows and some areas will have natural gas rationing.
Read: https://boereport.com/2018/11/26/seven- ... e-america/
3. I think the Wall Street consensus is wrong lots of the time and I think they are VERY WRONG about natural gas.
> Yes, we have massive natural gas underground in the United States.
> However, it does not come out of the ground on its own. It will take a heck of a lot more horizontal wells for "production capacity" to keep up with skyrocketing demand for U.S. gas. Since gas wells deplete faster than oil wells, we have to complete a heck of a lot of new gas wells each year, just to hold production flat.
> U.S. natural gas in storage is at a historic low TODAY because EIA has grossly under-estimating natural gas demand and they continue to do so. AND it is not just due to the weather.

So, keep an eye on the April NYMEX contract. By year-end even the Wall Street Gang will see the super tight U.S. gas market. If natural gas storage is drained down to the "Base Load" of around 1,000 Bcf, it will add another 3 Bcf per day to demand during the refill season (April to October). We will not drill our way out of this with gas under $3.00.