Natural Gas: The Wall Street Gang is starting to get it
Posted: Mon Sep 13, 2021 2:08 pm
TD Securities Investment Conclusion 9-13-2021
North American natural-gas supply/demand balance remains historically tight as we
approach winter heating season. This has resulted in continued strength in spot and
future natural-gas prices. In this note, we:
■ Put current (and forward) strip pricing in context of historical levels
■ Outline the supply/demand balance in the U.S.
■ Depict U.S. storage on an absolute basis and also relative to demand
■ Outline the gas price currently being discounted by the equities
■ Outline robust FCF yields using much lower than current HH pricing (US$3.00/mcf) < They still don't want to raise the ngas price forecast.
■ Finally, offer CF sensitivities of the group to both HH and AECO basis.
Key Takeaways
> Although most focus on absolute storage levels trending below the five-year
average, demand over this period has grown significantly. Given the combination
of recently stagnated production, demand growth, and low storage levels, the U.S.
inventories are at record-lows as measured in days of demand.
> Although natural-gas prices and natural-gas equities have performed well YTD,
on average the sector is pricing in ~US$2.50/mcf HH — with the larger producers
pricing in closer to US$3.00/mcf. In our view, the recent move in share prices
reflect much lower-than-current natural-gas prices.
> Given improvements in cost structures and sustaining capital, even at US$3.00/
mcf HH natural gas, the sector is trading at very attractive FCF yields of ~23%
based on market cap or ~14% based on EV.
> Unlike in previous cycles, leverage has largely disappeared from the capital
structures of higher-quality producers. We forecast median YE-2022 D/CF of 0.7x
for the Canadian gas producers and 1.8x for the U.S. gas producers at US$3.00/
mcf HH in 2022. This is below the rule-of-thumb sector leverage targets of ~2x
D/CF in previous cycles. In our view, this indicates that these companies are
better equipped to absorb commodity price volatility and/or return more CF to
shareholders via dividends/buybacks than we currently model.
North American natural-gas supply/demand balance remains historically tight as we
approach winter heating season. This has resulted in continued strength in spot and
future natural-gas prices. In this note, we:
■ Put current (and forward) strip pricing in context of historical levels
■ Outline the supply/demand balance in the U.S.
■ Depict U.S. storage on an absolute basis and also relative to demand
■ Outline the gas price currently being discounted by the equities
■ Outline robust FCF yields using much lower than current HH pricing (US$3.00/mcf) < They still don't want to raise the ngas price forecast.
■ Finally, offer CF sensitivities of the group to both HH and AECO basis.
Key Takeaways
> Although most focus on absolute storage levels trending below the five-year
average, demand over this period has grown significantly. Given the combination
of recently stagnated production, demand growth, and low storage levels, the U.S.
inventories are at record-lows as measured in days of demand.
> Although natural-gas prices and natural-gas equities have performed well YTD,
on average the sector is pricing in ~US$2.50/mcf HH — with the larger producers
pricing in closer to US$3.00/mcf. In our view, the recent move in share prices
reflect much lower-than-current natural-gas prices.
> Given improvements in cost structures and sustaining capital, even at US$3.00/
mcf HH natural gas, the sector is trading at very attractive FCF yields of ~23%
based on market cap or ~14% based on EV.
> Unlike in previous cycles, leverage has largely disappeared from the capital
structures of higher-quality producers. We forecast median YE-2022 D/CF of 0.7x
for the Canadian gas producers and 1.8x for the U.S. gas producers at US$3.00/
mcf HH in 2022. This is below the rule-of-thumb sector leverage targets of ~2x
D/CF in previous cycles. In our view, this indicates that these companies are
better equipped to absorb commodity price volatility and/or return more CF to
shareholders via dividends/buybacks than we currently model.