Natural Gas Bounced Back but is it enough for NG Producers?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The prices of natural gas tumbled down during most of August after they had increased precipitately during June and July. In recent days, however natural gas prices rallied. Nonetheless, during the time the price of natural gas had declined, it seems to have little impact on the stocks of major oil and natural gas producers such as Chesapeake Energy Corporation (NYSE: CHK) and Chevron Corporation (NYSE: CVX). Let’s examine the recent shift in the natural gas market, and determine its effect, if at all, on the shares of major oil and natural gas producers.
During last month the price of natural gas fell by 14.6%; by extension, the price of United States Natural Gas (NYSEMKT: UNG) also tumbled by 14.6%. On other hand, during the first few days of September natural gas prices have rallied. The fall in prices during August was mostly related to changes in the weather – the high temperatures have come down from the highly warmer than normal weather that was in July – that contributed to the decline in the demand for natural gas in the power sector (for operating Air conditioners).
On the other hand, the recent shift in the weather to Hurricane season may pose some concerns in regards to natural gas production. Hurricane Isaac did cause a shutdown of production of oil and gas in the Gulf of Mexico for several days. But despite this shutdown, it didn't affect much the natural gas market since the NG production in the Gulf of Mexico is only responsible for less than 5% of the U.S overall production (based on the U.S Energy Information Administration). Nonetheless, Hurricane Season still poses threats to production that could result in a sharp rise in the price of natural gas. The recent rally in natural gas prices might continue as the weather may affect the injections into the storage.
The fall in natural gas prices during August and the first days of September didn't make things better for many natural gas producers as NG prices are still very low compared to 2011 and the five year average: the current price is nearly $1.29 below the price level from the same time in 2011; it is also $2 below the 5-year average price.
The result of the decline in the price of natural gas and the shift of many oil and gas producers from natural gas to oil is a drop in the effect of natural gas on their stocks: during 2012 the linear correlation between Chesapeake’s stock (daily percent change) and UNG was 0.27; the correlation between Chevron and UNG, 0.07. This means under certain assumptions the shifts in natural gas prices could explain only 7% of the Chesapeake’s stock volatility and only 0.6% of Chevron's.
The decline in the price of natural gas while the price of oil continues to soar also shrinks the share of natural gas revenues out of the total revenues for these companies.
There is still an ongoing shift from producing natural gas to crude oil in the U.S: According to the recent EIA report there are only 473 natural gas rigs; during the same time in 2011, the number of rigs was nearly 900. Further, during the second quarter of the 2012 Chevron's net natural gas production declined by 9% compared to the parallel quarter of 2011.
In regards to Chevron, its natural gas related revenues account for only 10% of its total revenue (as of 2011); this share is likely to further shrink in 2012 based on the following: The currently low natural gas prices, the high extraction costs of shale gas, and the drop in production in the U.S.
Chesapeake's natural gas operations accounted for nearly 53% of the company’s revenue during last year. Therefore the recent fall in natural gas prices should have adversely affected the company's stock via the valuation of company (in terms of DCF).
Chesapeake is still in the process of selling off its assets to pay off its $22 billion shortfall: After the company had sold Chesapeake Midstream Partners, there are reports that the company is looking to sell its Fort Worth office tower. The sell off of company’s assets that are directly related to the production of natural gas, is likely to also lower the company’s exposure to natural gas, which will further lower the share of natural gas revenues out of the total revenues of the company.
As indicated from the chart, Chesapeake and natural gas prices haven't perform well during the year s far.
The Bottom Line
Even if natural gas prices were to further rally and maintain their upward trend of the past few days, I still think it won’t help these oil and gas producers as the low prices, compared to recent years, and further decline in the share of natural gas in the total share in revenues, due to a shift in these companies strategy to switch from gas to oil, will further lower the impact of shifts in natural gas prices. In regards to natural gas, there are some concerns from the production but the demand could start to pull down as the weather will become comfortable.
For further Reading see: Is Chesapeake walking towards the right path?
liorc has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.