Energy Prospectus

Opening Prices
> WTI is down $1.53 to $89.79/Bbl, and Brent is down $1.69 to $91.00/Bbl.
> Natural gas is up 12.6c to $4.358/MMBtu.

AEGIS Notes
Oil

West Texas Intermediate dipped below $90/Bbl Tuesday morning as traders weigh possible de-escalation between Russia and Ukraine
> French President Emmanuel Macron said that he got assurances from Putin that there would be no “escalation.” (BBG)
> Tensions between Russia and Ukraine have contributed to oil’s nearly $15/Bbl rally in 2022

Refinery outages in the U.S. could weigh on crude prices
> Marathon’s Galveston Bay refinery in Texas City, Texas, may take several weeks to resolve issues that surfaced last Friday after a city-wide power loss. Freezing weather late last week caused the power outage.
> Marathon’s 593/Bbl 2-plant refinery complex is the second-largest in the U.S.
> Valero’s Texas City refinery began to restart at the 225 MBbl/d plant, which also shut during Friday’s power loss

Shale drilling discipline could unravel Citibank warns (Bloomberg)
> Oil executives tempted by the prospect of the high oil prices are showing all the signs of abandoning pledges to keep production growth flat or small, Citigroup said
> Drillers are poised to increase spending by almost 40% this year, based on earning presentations revealed so far, Citi analyst Scott Gruber wrote to investors
> U.S. companies will probably boost domestic oil production by as much as 1 MMBbl/d in 2022, according to various analysts < Which still won't get U.S. production back to pre-pandemic levels.

Natural Gas

Gas prices are up this morning, snapping their three-day streak of losses
> The prompt-month Henry Hub (Mar' 22) contract is now trading 12.6c higher at $4.358
> The February gas-weighted heating degree day forecast increased by 2 HDDs to 762 HDDs
> Lower-48 dry gas production has recovered strongly and is now back above 92.5 Bcf/d as freeze-offs dissipate
> LNG feedgas demand is down by 1.13 Bcf/d this morning, near 11.6 Bcf/d

Eastern Gas (Dominion) South prices have fallen over the last couple of weeks as the Mountain Valley Pipeline faces delays
> A federal appeals court invalidated an endangered-species study required for Equitrans Midstream Corp's $6.2 billion Mountain Valley natural gas pipeline under construction from West Virginia to Virginia, concluding that the study was deficient on February 3
> The pipeline is unlikely to enter service in 2022 as the recent setbacks have pushed the in-service date, initially expected in summer 22, to sometime in 2023
> The Summer '22, Winter '22/'23, Summer '23 strip prices have all fallen by 17c, 14c, and 18c to -$1.08, $-0.81, and $-0.96 behind the Henry Hub benchmark
> Takeaway capacity constraints are expected to worsen during the summer as local demand in the Northeast wanes and egress pipeline capacity is maxed out
> AEGIS notes the pipeline delay will also limit production growth in 2022

Note from Stifel
"U.S. natural gas storage appears on track to exit the heating season with a wide deficit to the 5-year average despite what looks like a second consecutive slightly warmer-than-normal winter. Recent cold fronts notwithstanding, this winter's U.S. heating degree days continue to lag due to a warm October through December. However, the weather-neutral fundamentals that reversed a 12% storage surplus at 1/9/21 to a 5% deficit by 9/18/21 are still largely in place. Accordingly, we believe U.S. natural gas prices, which have reflected near-term premiums for winter weather and tension surrounding Ukraine, are likely to remain elevated beyond the heating season. We also see an attractive risk reward in several natural gas prone stocks."

"Natural gas prone stocks have recently underperformed their oil-weighted counterparts. For example, over the past three months, CNX and CTRA are up 4% and 8% and CRK and RRC are down 19% and 17%. These compare to our bellwether oil group's 19% increase over the same timeframe.
> CNX remains committed to capital return, primarily via stock buybacks. The company has repurchased 10% of its outstanding shares since 3Q20, including 8.6 MM shares in 3Q21 (4% of outstanding shares).
> Our CTRA 2022 FCF/EV yield of 16% is in-line with our bellwether oil group average while the company's projected 2022 dividend yield of 7.8% is near the top of the group. At last report, the company's 2022 natural gas production was unhedged. Approximately 10% of 2022 and 2023 forecasted gas volumes are exposed to Waha gas prices.
> CRK benefits from price-advantaged Gulf Coast markets. We look for the company to achieve its debt/EBITDA target of 1.5x by YE22 when it will pivot to capital return. Longer-term, CRK appears capable of returning its enterprise value within 10 years.
> RRC's 2022 FCF/EV yield of 20% compares to our mid-cap oil peer group average of 17%. We look for the company to aggressively buy back shares in 2H22 as debt/TTM EBITDA declines below 1.0x by 3Q22.

CTRA, CRK and RRC are in our Sweet 16 Growth Portfolio. You can find my recent profile on each company on the EPG website under the Sweet 16 tab.

At the time of this post, the NYMEX strip for Henry Hub gas is over $4.25 through MAR23. I would love to see our gassers hedge with collars that have $3.50 floors and $5.00 ceilings. No matter where storage is at the end of March, ngas prices are likely to pull back in Q2, so collars thru October look like a wise move to me.

Unless the natural gas shortage in Europe is resolved this summer (highly unlikely), I expect LNG exports to remain near capacity. Combine that with more demand to refill storage and we should see a tight U.S. gas market all year.

Dan--do you see the Mountain Valley P/L nonsense having a material effect to any of our gassers? Thanks.

The Mountain Valley Pipeline is an under-construction natural gas pipeline in the United States from southern Virginia to northwestern West Virginia. The project will consist of 304 miles of pipelines with an additional 8 miles as part of the Equitrans Expansion Project, which will help to connect new and existing pipelines throughout the region. The completed pipeline would have the ability to ship 2 million dekatherms of natural gas per day for distribution, with a large quantity of that gas being produced from the Marcellus and Utica shale formations.

Limited pipeline takeaway capacity will keep a lid on Marcellus/Utica production, but that will also help keep natural gas prices high all year. AR, CTRA, EQT and RRC all have outstanding marketing teams and they have sufficient takeaway capacity that should be enough to keep their production at what I am using in the forecast models.

CTRA looks very good to me since only a small percentage of their gas is hedged and most of it with collars that have ceilings of $6.97.

Note from Keith Kohl, President of Energy Investor

"As crude prices inch higher toward the key psychological benchmark of $100 per barrel, one has to wonder if any forces can put a lid on rising prices. As it turns out, progress in Iran-U.S. nuclear talks may be able to provide a little relief. Last Friday, President Biden restored sanctions waivers that would once again allow Iran to sell its crude on the global market.

That’s the carrot on a stick for Iran to start cooperating again with regard to its nuclear programs.

Oil traders will take this as a positive note, and one that could add millions of barrels of oil to the global market in relatively short order. However, if you think this action will take the bulls out of the driver’s seat… think again.

For starters, one of the worst-kept secrets in the oil markets is that China has been willing to buy Iranian crude regardless of sanctions. So will this action flood the global markets with more crude or simply put Iranian crude back on the official books?

This won’t be enough to prevent $100/bbl oil."

Dan--thanks for the reply on Mountain Valley.

Agree on the Iran deal; my guess is Biden will ink a deal with Iran because that's a very Biden thing to do. Some incremental bbls will be added to market but the net increase will be minor as Iranian bbls are already being marketed, plus the fact that Iran would probably have challenges ramping up production. But the oil market would have a short term panic sell off which would be another great buying opportunity for us.

Good points, I like weak days. Always a good point to add

I added CLR and tempted to buy AR & ctra here

Trading Economics:
"WTI crude futures fell to below $90 per barrel on Tuesday as investors turned their attention to the Iran nuclear talks that are set to resume today. Friendly gestures by Washington and Tehran have sparked some optimism that the two sides are inching toward reviving a nuclear deal that would lead to a resumption of official crude exports from the Persian Gulf producer. Still, geopolitical tensions in Ukraine, tight global supplies and doubts that OPEC+ will be able to deliver on a promised increase in supply continue to keep prices close to 2014 highs reached earlier in the week."

"US natural gas futures were trading below $4.5 per million British thermal units, moving further away from a 3-month high of $5.5/MMBtu hit on February 2nd as disruptions following last week's winter storm started to ease and demand is seen weaker than previously anticipated during the next two weeks amid forecasts for less cold. US gas demand, including exports, is expected to fall to 119.8 bcfd next week from 130.3 bcfd this week, according to Refinitiv and below its outlook on Friday. Meanwhile, the EIA data showed US utilities pulled the most significant amount of natural gas from storage during the brutally cold week ended January 28th, sending domestic inventory levels 5% below the 5-year average."

I expect bullish storage reports for both oil and gas this week.