BofA Equity Research raises ngas price forecast - Sept 20
Posted: Mon Sep 20, 2021 6:29 pm
Gas strength: BofA raises estimates
A confluence of issues have lifted global natural gas prices led by Asian LNG and Dutch
TTF – perhaps the latest prescient example of unintended consequences of energy
policies shying away from fossil fuels. But regardless of causation the net is European
natural gas storage heading into winter ~18% below five year average levels and is one
catalyst that has pulled US gas prices higher. But there are limits, capped by limited LNG
capacity albeit fundamental support for domestic prices comes from US storage below
normal and tightened further by weather adjusted supply / demand balance much more
inelastic than prior years. With this backdrop, our Commodity Team has raised its gas
price assumptions with Henry Hub expected to average $4.25 in Q4 & $3.45 in 2022 –
but still significantly below current strip. While they acknowledge asymmetric upside risk
ahead of winter they also believe that the current winter risk premium has peaked.
Some high beta gas names have hedged away the upside
Our 2022 EPS estimates for gas weighted names increase 64% on average, but there
are offsets as many of the higher beta names have hedged away the upside. Additionally
issues diminishing the translation to share performance is widening basis differentials
mainly in the Permian and Mid-Cont. The net is that this tempers the impact on several
US ‘pure plays’ from strong strip gas prices one to two years out. On balance we see the
impact of current gas price strength having a relatively predictable impact on pure play
gas names, with the mix of balance sheet ‘beta’, hedging constraints and regional
exposure all coming together to lift RRC & COG in particular, and to a lesser extent EQT
(74% hedged ’22), SWN (79% hedged ’22) and CNX (~90% hedged, ’22).
No reason to chase gas names that have already moved
Under our valuation framework which anchors value to ex growth, unlevered DCF, the
long end of the curve is little changed vs the rally in spot means we see much of current
strength already discounted by a rapid move in some of the more gas weighted equities.
Accordingly we see no reason to chase US gas names for all intents & purposes have
already moved. Still, there are many oil producers that retain significant upside to
current gas price strength – without hedging away the upside and with exposure to what
we continue to believe is upside risk to the long end of the oil curve.
For both oil & gas leverage: APA, OXY, XOM & COP
On balance higher gas prices lift the ex-growth DCF value for some of the most gas
weighted names, especially those with significant debt in their capital structure. But
reflecting on the value of incremental cashflow, net of hedging dilution, we believe the
speed of the sector response leaves us wary of chasing the long-end of the US gas curve
while acknowledging there may be an apparent trading opportunity for some US pure
play’s should the risk of an outsize winter spike play out. With that said, many pure play
gas names do not provide the leverage to what we view as a structural supply / demand
deficit for oil over the next five years. Conversely, many of the oil levered names provide
significant exposure to both US and international gas price leverage led by APA, OXY,
XOM & COP.
A confluence of issues have lifted global natural gas prices led by Asian LNG and Dutch
TTF – perhaps the latest prescient example of unintended consequences of energy
policies shying away from fossil fuels. But regardless of causation the net is European
natural gas storage heading into winter ~18% below five year average levels and is one
catalyst that has pulled US gas prices higher. But there are limits, capped by limited LNG
capacity albeit fundamental support for domestic prices comes from US storage below
normal and tightened further by weather adjusted supply / demand balance much more
inelastic than prior years. With this backdrop, our Commodity Team has raised its gas
price assumptions with Henry Hub expected to average $4.25 in Q4 & $3.45 in 2022 –
but still significantly below current strip. While they acknowledge asymmetric upside risk
ahead of winter they also believe that the current winter risk premium has peaked.
Some high beta gas names have hedged away the upside
Our 2022 EPS estimates for gas weighted names increase 64% on average, but there
are offsets as many of the higher beta names have hedged away the upside. Additionally
issues diminishing the translation to share performance is widening basis differentials
mainly in the Permian and Mid-Cont. The net is that this tempers the impact on several
US ‘pure plays’ from strong strip gas prices one to two years out. On balance we see the
impact of current gas price strength having a relatively predictable impact on pure play
gas names, with the mix of balance sheet ‘beta’, hedging constraints and regional
exposure all coming together to lift RRC & COG in particular, and to a lesser extent EQT
(74% hedged ’22), SWN (79% hedged ’22) and CNX (~90% hedged, ’22).
No reason to chase gas names that have already moved
Under our valuation framework which anchors value to ex growth, unlevered DCF, the
long end of the curve is little changed vs the rally in spot means we see much of current
strength already discounted by a rapid move in some of the more gas weighted equities.
Accordingly we see no reason to chase US gas names for all intents & purposes have
already moved. Still, there are many oil producers that retain significant upside to
current gas price strength – without hedging away the upside and with exposure to what
we continue to believe is upside risk to the long end of the oil curve.
For both oil & gas leverage: APA, OXY, XOM & COP
On balance higher gas prices lift the ex-growth DCF value for some of the most gas
weighted names, especially those with significant debt in their capital structure. But
reflecting on the value of incremental cashflow, net of hedging dilution, we believe the
speed of the sector response leaves us wary of chasing the long-end of the US gas curve
while acknowledging there may be an apparent trading opportunity for some US pure
play’s should the risk of an outsize winter spike play out. With that said, many pure play
gas names do not provide the leverage to what we view as a structural supply / demand
deficit for oil over the next five years. Conversely, many of the oil levered names provide
significant exposure to both US and international gas price leverage led by APA, OXY,
XOM & COP.