Raymond James update on U.S. Natural Gas Market - Dec 19

[dan_s]

Raymond James & Associates Equity Research

Energy Stat: Weaker U.S. Natgas Price Outlook; Still Expect Slight Upside to Strip & Very "Healthy" Absolute Prices

Send me an email if you'd like to see the full report: dmsteffens@comcast.net

Heading into year-end, volatility is the name of the game for U.S. natural gas markets, with front month Henry Hub oscillating (often violently) between $5 and $10/MMBtu since June. One illustration of the volatility: while the forward twelve-month strip is down ~10% in the last six months, it is still up more than 40% as compared to a year ago. As detailed below, while near-term volatility is likely to continue, we remain constructive and continue to take the "over" on 2023 U.S. strip pricing.

Today's Stat addresses:
1) the evolving 2023 supply outlook — Permian, Haynesville, and now Eagle Ford growth;
2) updated views on U.S. LNG exports (continued delays of Freeport);
3) a brief summary of other pertinent demand factors (e.g., pipeline exports, industrial demand, wind/solar penetration); and
4) our updated inventory and price forecasts through 2024, including a scenario analysis around the perennial “WWW” – winter weather wildcard.
We finish with stocks to play the natgas theme.

Taking all of these factors into account, we remain positive, but admittedly less so than our bullish outlook from this past September .
In broad terms, we believe that tightness from LNG exports, coal switching, and industrial demand will largely offset large increases in supply and continued development of renewables. Although we are lowering our 2022 (due to the mark-to-market) and 2023 price deck, we remain above the Strip in 2023. From an upstream perspective, this creates a bit of a "best of both worlds" scenario in which producers can "have their cake" (i.e., robust supply growth) and "eat it too" (i.e., sell at healthy prices).

Further, 2024 speaks to the accelerated cyclical nature of U.S. natgas, as does the likely rebound thereafter as both water and pipeline exports ramp in the middle of the decade and supply becomes harder to find.