Energy Prospectus

Opening Prices:
> WTI is up $1.56 to $122.49/bbl, and Brent is up $1.63 to $123.90/bbl.
> Natural gas is up 7.2c to $8.681/MMBtu.

AEGIS Notes
Oil

EIA's June DPR report shows that the drillers in the Permian Basin are increasing oil production
> Output from the Permian reached 5.14 MMBbl/d in May, the highest since March 2020
> The shale basin is forecast to increase supplies through July
> However, the impact of rising domestic crude supply on fuel costs will be significantly mitigated by a lack of refining capacity
Per EIA's weekly estimates, total U.S. crude oil production has only increase by 100,000 bpd since the end of 2021 despite a significant increase in the active rig count (11.8 million bpd to 11.9 million bpd).

Some Asian buyers have been purchasing Middle Eastern crude earlier than normal on the physical market, an indication of strong demand in the largest oil-importing region (BBG)
> Refiners from Japan to Taiwan, Thailand, and South Korea purchased cargoes for loading from Qatar, Abu Dhabi, and Oman in August, with some deals being made at premiums higher than the previous month, according to traders
> The big question weighing on Asian oil demand is whether China's economy able to swiftly recover from the crippling Covid-19 lockdowns

Natural Gas

Natural gas futures are up by 7.2c to $8.861 this morning as weather forecasts tilt bullish
> The most change happened in the 6-10 day range, where the average population-weighted average temp increased by 7.5 °F, led by gains in the 6-10 day range for the Northeast, South Central, and Midwest regions
> The warmer temperatures have increased gas demand for power generation forecasts for the regions
> Lower-48 dry gas production is down by around 1.2 Bcf/d since last Friday

LNG tanker rates hit record highs as demand soars (Reuters)
> Spot-market rates for liquefied natural gas (LNG) tankers this week set new records as traders bid up available vessels to meet rising global demand for the chilled gas, according to brokers
> Spot rates to transport 160k cubic meters of LNG in the Atlantic is $100,000/day, whereas Asia rates are at $85,000/day
> Spot rates jumped by around 4% last week to bring the year-to-date gains to around 73%
> AEGIS notes that the disruption at Freeport LNG should have reduced demand for tankers, but so far, that has not been the case

Shortly after the markets opened, HH ngas futures moved sharply lower for no apparent reason. Sometimes one large sale can trigger lots of automated trades due to tight stop loss limits being very tight.

https://www.prnewswire.com/news-release ... 67658.html

Dan - see update on Freeport LNG. May not be operational until 90 days which I think is driving the impact to futures

Trading Economics:
"US natural gas futures tumbled almost 20% to test the $7/MMBtu mark for the first time since early May after Freeport LNG said it doesn't expect the terminal to return to entire plant operations until late 2022, with partial operations resuming perhaps in three months. The recent explosion at one of the biggest US liquefied natural gas export terminals sparked worries that some domestic supplies will be stuck onshore despite soaring international demand. Freeport receives about 2 billion cubic feet of gas per day or roughly 16% of US LNG export capacity."

Putin loves this news because Europe will now have to keep buying Russian gas or freeze to death next winter.

We still have a very tight U.S. gas market and this early summer heat wave that will keep demand from ngas fired power plants high.

FYI if I lower my 2H 2022 HH gas price for modeling purposes to $7.00/mcf it will lower my valuation of Comstock Resources (CRK) by ~$2 to $37/share.

Comstock is the closest we have to a "pure gasser".

If the Freeport LNG facility stays offline until late 2022 it will likely keep natural gas prices higher in early 2023 since the bidding war for LNG cargos will go into hyperdrive in Q1.

Dan, as I understand it, the shutdown of this facility only decreases demand by about 1.5% and we need a 3.5% increase in production (or decrease in demand) to get storage into the 5 year average range. If correct, the drop in NG pricing of about 15% is way overdone.

Please comment.

I agree. What happened this morning was one large sale kicked off a lot of automated sales of long positions. I think we will see some bullish ngas storage reports thanks to the heat wave, which will show the traders how tight the U.S. gas market is. Unless we have a lot of cool weather July and August, I don't see any way we get ngas storage back to the 5-year average before the winter starts.

I know AR sells a lot of BG in the LNG plants. Do they have a particular vulnerabilty with the plant that shutdown. How much do our other gassers provide to the LNG plants? Or shouldn't I worry about it. My two largest positions are AR and CRK.

I saw this as an opportunity to add to my gassers position.
In my opinion it certainly looks overdone.
When the summer bidding war gets underway, no one will remember Freeport until they try to come back online.
Maybe they will overdo it to the upside when that happens.

Kevin

AR and CRK do not have any direct exposure to the Freeport LNG facility that is shut down for six months. They both have very good marketing teams. Today's dip in the gas price might lower my valuation of each stock by $2 because it only impacts two quarters and likely will cause demand for LNG in 2023 to be even stronger than it would have been. Europe could be in a real energy crisis by Q1 2023.

AR gets a lot of revenue from NGL sales. Both of them have quite a bit of gas hedged for 2H 2022 that softens the impact.

Closing Prices: AEGIS Last Look - Gas plunges more than 16% | Oil gives up early gains to settle lower
> Prompt-Month WTI (Jul 22) was down $-2.00 on the day, to settle at $118.93
> Prompt-Month Henry Hub (Jul 22) was down $-1.420 on the day, to settle at $7.189

You can download my valuation models for AR and CRK and put in lower natural gas prices for Q3 and Q4 to see how the lower prices impacts earning, cash flow and the stock valuations. The models are all macro driven Excel spreadsheets that automatically update when future period assumptions are changed at the bottom.