Energy Prospectus

I noted that the shares of gas companies are amongst the best performing oil and gas stocks in 2024. I am no expert on the US gas market, but I decided to have a quick look at the “why” for this.

2024 performance of gas companies shares
• Antero is topping the 2024 performance list with a whopping +56.8% in 2024.
• ARC resources (+30.3%), Comstock (+28.2%), Range resources (+27.6%), CNX (+22.6%), Advantage Energy (+22.1%), Gulfport (+20.6%) and Chesapeake (+19.1%) are all well up in 2024.
• EQT is up a modest 8.5%.

Gas prices and activities in 2024
The gas companies share price performance is in sharp contrast with gas prices and gas activity levels. Both are down in 2024:
• The Henry Hub gas price dipped in 2024 to $ 1.25-1.40/MM Btu, before recovering to a still low $ 2.11/MM Btu.
• Gas companies have unit costs (inclusive depreciation, interest and overheads) varying from $ 1.55/MM Btu to $ 2.70/MM Btu. Gas companies thus are not fully recovering costs.
• With current gas prices gas companies are struggling with their profitability in 2024.
• If the gas prices do not increase above the $ 2.00/MM Btu average level, then multiple gas companies will report 2024 losses.
• Companies such as Chesapeake and Range Resources have announced production cuts and reduced activities.
• The number of rigs drilling for gas in the US in 2024 is down -24%, from 83 rigs (Q1) to 63 rigs (Q2), The latest number is 57 rigs.

Almost all gas companies have decent balance sheets and are not in immediate trouble. Furthermore, I do not believe that the current low gas prices will be sustained.

Hope on recovery of the gas price
The most logical explanation for the increase of the share prices is that investors are anticipating higher future gas prices.
To test this theory, I applied three gas prices ($3.00/4.00/5.00/MM Btu) to the year 2026 and calculated the 2026 PE ratios:
Antero: 32.0 - 12.6 - 7.9
EQT: 18.3 - 7.0 - 5.0
Range Resources: 26.0 - 11.7 - 7.6
Advantage: 11.1 - 5.8 - 3.6
ARC resources: 8.9 - 6.9 - 5.9
Chesapeake: 36.4 - 7.8 - 4.4
CNX: 16.1 - 10. - 7.3
Comstock: 47.0 - 6.7 - 3.6
Gulfport: 15.3 - 6.6 - 4.2

With a gas price of $ 5.00/MM Btu: All gas companies have good to excellent PE’s, ranging from 3.6 to 7.9.
With a gas price of $ 4.00/MM Btu: All gas companies have acceptable to good PE’s, ranging from 5.8 to 12.6.
With a gas price of $ 3.00/MM Btu: Some gas companies are unattractive with PE’s well above 20.

The gas companies with the highest variation in the PE are the companies which have the highest unit costs (Antero, Chesapeake and Comstock).

Conclusion
Investing in gas companies is hoping for better gas prices ($ 4.00/MM Btu or more).
If gas prices get stuck at a $ 3.00/MM Btu level in 2026, then gas companies financially are not in trouble, but their PE’s are not attractive. There are more attractive investments.
With $ 5.00/MM Btu in 2026, investing in gas companies is investing in a winner.

Thanks for the number crunching!

Electricity demand growth for AI data centers will increase demand for U.S. natural gas by an estimated 8 Bcfpd over the next two years. Over 100 new natural gas fired power plants will be needed to meet that level of demand + many states are already seeing demand for electricity exceed supply. Texas is one of those states.

I heard at the Dallas energy conference that some analysts are forecasting that U.S. ngas prices could exceed $7.00/MMBtu by Q4 2025. Raymond James forecast is now $7.50 for 2026.

DEC25 NYMEX contract for HH ngas closed today at $4.255/MMBtu

HH ngas actually exceeded $13.00 in 2005 and 2008.

But this second quarter should be impressive for the Sweet 16 . On average, (excluding EQT and SBOW) the component of NGL/nat gas for each company is 44%. IF nat gas plateaus at $2.90 for the second quarter(57% increase), the unhedged revenue component of nat gas/company will increase 25%. Yet these companies are getting hammered by WS. I'm guessing the traders don't realize that Diamondback et.al produce nat gas.(sarc)

I believe that Henry Hub gas prices in the near future will go up.

Stable gas prices
If there was such a thing, stable long term Henry Hub gas prices would be around $ 3.50-4.50/MM Btu. However, I believe that stable gas prices do not exist. Gas prices will be either well above or well below the $ 3.50-4.50/MM Btu level.

Low price environment
With the current low gas price environment, few people are interested to invest in new gas capacity.
Investors want to wait for gas prices to recover before they take a FiD’s on new gas wells, gas treatment facilities and gas pipelines.

Lead time of gas facilities and pipelines
Gas treatment facilities with cooling, low temperature separation, gas drying facilities (e.g. glycol) and compression facilities are a lot more complex than oil facilities. Oil facilities just need a separator for degassing/dewatering, a heater for stabilization and a pump for export. These are quick to construct.
Gas facilities in contrast will need 1.5- 2.5 years before they come on stream.

Gas export pipelines are also a problem, as everybody with gas at hand in west Texas will tell you.
When I was mentoring in the past young pipeline engineers, I always taught:
• Calculate the pipeline size based on the capacity number provided to you.
• If it is an oil pipeline deduct two inches as you always can squeeze 30-50% more oil through the pipeline with drag reducers.
• If it is a gas pipeline add two inches because you are stuck with the capacity forever.
Gas pipelines also have long lead times, not only in construction but also in licensing, again leading to long lead times

Effect on gas prices
With not enough gas facilities/pipelines available when gas prices reach stable prices levels, gas prices will overshoot as demand will exceed supply. High gas prices than will trigger more projects which after a couple of years will result in oversupply and lower gas prices. Thereafter the cycle will repeat.

Effect of growing demand
A growing demand will have no impact on long term gas prices as US probable and potential gas reserves are a multiple of the proven gas reserves. Gas supply is not a constraint. Gas demand is.

Conclusion
I think that gas prices will recover over the next 12 months to $ 3.00-3.50/MM Btu. Thereafter gas prices will keep on rising for another 3-4 years to higher levels (ultimately $ 6.00-8.00/MM Btu (?). Thereafter a new decline will set in.