Natural Gas Market Update - Feb 16

[dan_s]

From Scotiabank Equity Research 2/16/2021. See their estimate of the next two storage draws that would push U.S. storage 200 BCF below the 5-year average as of Feb 19th.

OUR TAKE: Positive. It was a wild weekend in the natural gas and power markets, with record gas pricing (particularly in the MidCon), peak power prices in ERCOT ($9,000/mwh) and rolling blackouts across the South. It might not be more than a short-term surge in the commodities, but this polar plunge is likely to result in the largest natural gas storage withdrawal on record, dropping storage levels below the five-year average level. We thought it might be helpful to provide some market commentary and pick a few beneficiaries.

Record gas prices in parts of the U.S. The cash market shot up as we headed toward a long weekend of national winter weather advisories, even Houston got a few inches of snow. And while our universe has very limited exposure to the cash markets (<10%), it doesn’t mean the equities won’t see some near-term benefit (+5% on Friday, 2/12). Last Friday, the national average for weekend deliveries averaged $57.75/mmBtu according to Platts Analytics, as the MidCon region averaged $238.75. Henry Hub indexed at $6 and most of the Appalachian points remained in the single digits.

Strip response has been muted. Amid the surge in the cash market, the 2021 strip rose just 3c on the week, to average $2.93 and the 2022 curve moved up only 2c to average $2.72/mmBtu. As the winter patterns continue throughout the week, storage forecasts trend below expectations and freeze-offs impact supply, we expect a near-term improvement in Nymex pricing.

February erasing storage surplus. The withdrawal for the week ended 2/12 is forecasted at 265 bcf, moving storage levels just barely above the five-year average. The current estimate for the week ending 2/19 is for 375 bcf, the largest withdrawal dating back to when the EIA began tracking in 1994 by 4%. This would put storage ~11% below the five-year average and our end of withdrawal season storage level estimate ~15% below the 10-year average.

Tighter fundamentals, risks are in supply and switching. Supply has come off over 4.5 bcf/d in the last week as freeze-offs, particularly in Texas appear to be impacting production. In addition to near-term supply curtailments, conversations around gas to coal switching have entered the mix as regional gas pricing cause coal plants to appear more economic. As coal has been retired (25 GW in the last 2 years), that switchable number has declined, with most industry participants forecasting <3 bcf/d.

Stock sensitivities, although very hedged. In Exhibit 1, we outline our producers hedge position for 2021 and 2022, noting an overall hedged portfolio of 72% in 2021 and 29% in 2022. CNX and NFG have numbers updated for calendar year-end, while the rest of the group’s portfolio is as of 3Q20. We expect any material movement in the strip will be most beneficial for COG and RRC. < As I posted yesterday under the Sweet 16 tab, of our Sweet 16 "gassers" I think Comstock Resources (CRK) has the most upside because they have less gas hedged for 2021 than AR, EQT and RRC. However, a rising tide (gas prices) will lift all boats and the large-caps may draw a lot more attention.

[dan_s]

Henry Hub spot prices have gone crazy, Henry Hub cash market now over $17/MMBtu, while record demand and freeze offs are happening in all basins. I believe that Comstock Resources (CRK), Range Resources (RRC) and Goodrich Petroleum (GDP) can sell some of their unhedged gas into the Henry Hub at these high spot prices.