Natural Gas is on the Rise; Will it Continue?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The price of natural gas rose precipitately in recent days. Moreover, during the past three months (between September and November) the price (short term delivery) of natural gas rose by nearly 33.6%. Despite the recent rise, the price of natural gas is still well below its historic figures. This, in turn, is probably among the reasons for little to no growth in the profit margin of natural gas producers such as Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM). Let’s examine what’s next for natural gas.
During October and November, the price of natural gas increased by 12.7%; by extension, the price of United States Natural Gas (NYSEMKT: UNG) also rose by 3.2%. The recent rally in natural gas may have been due, among other factors, to the adverse ramifications of Hurricane Sandy, the cold weather that raises the demand for natural gas for heating purposes, and the ongoing fall in the production of natural gas as reflected by the ongoing decline in the number of natural gas rigs.
The chart below presents the recent rise in the prices of natural gas and UNG.
In regards to the natural gas production, according the recent EIA weekly update, the production levels have declined by nearly 1% compared to the previous week. The imports from Canada also declined last week. Moreover, according to a recent report, the number of natural gas rigs declined from 877 in 2011 to 413 as of last week – a drop of nearly 464 rigs. If the downward trend in the number of rigs will continue, it could suggest that production will further dwindle.
From the demand side, the recent rise in the demand for natural gas from the residential, commercial, and industrial sectors more than offsets the drop in demand in the power sector. The return of the winter and colder than normal weather has contributed to the rise in demand for natural gas for heating purposes. Conversely, the power failure in many parts in the Northeast due to Hurricane Sandy, along with the shift back from using natural gas to coal in the power sector, is likely to keep lowering the demand in this sector. Nonetheless, the expected rise in total demand for natural gas on account of a colder than last year’s winter should continue to help rally the price of natural gas.
Let’s examine how the current low price of natural gas has affected the profitability of major oil and gas producers.
The recent rise in the price of natural gas might help raise the profit margin of major natural gas and oil producers. Nonetheless, the price of natural gas is still low, compared to previous years. Therefore, if the price of natural gas will remain low for the season, then this could suggest the profit margin from selling natural gas is likely to remain lower than previous years’.
The table below presents the operating profitability of major oil and gas producers vs. the quarterly price of natural gas in 2011 and 2012.
As seen above, the price of natural gas during the third quarter of 2011 was $4.06 compared to $2.90 in the third quarter of 2012. This represents a 29% drop. The operating profitability (excluding goodwill costs) of Chesapeake Energy (NYSE: CHK) has declined from 37% in Q3 2011 to nearly 6% in Q3 2012. In comparison, Chevron’s operating profitability has also declined from the third quarter of 2011 to Q3 of 2012, from 21% to nearly 17%; the operating profitability of Exxon Mobil remained flat at 15%. This is only a partial overview as there are of course other factors that could have affected each company’s operating profitability such as the price of crude oil, operating costs, rate of production and more. At face value, however, it does show the current low natural gas price isn’t helping these companies to increase their respective profitability.
Therefore, even if the price of natural gas will continue to rise, as I believe it will, it will continue keeping down the profitability of major gas producers in the quarters to follow; unless, of course, the price of natural gas will reach its previous years’ levels, which currently seems less likely.
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liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, 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, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!