America Has Gas....Smell Anything Rotten?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm not a market timer. The last time I bought a stock thinking it couldn't get anymore beaten down...it did. It sure would have been nice to have bought it today at its lower price. The fundamental reasons for my purchase are still in place, that being sound management and a good business plan. So what does this have to do with natural gas stocks? The price bottom hasn't been reached. I want to buy, but I believe the bottom has further to go. How can that be when I read in the WSJ that natural gas for June delivery gained 33.5 cents or 16.5 percent? Or how about the recent talk that the U.S. will become a net exporter? Sure in 2015 when the first of several facilities will be ready to export it. One colder than normal winter could raise prices and lower over-all capacity long before then. Everyone and their uncle are telling you now is the time to buy in. Natural gas will come back, just not as quickly as a lot of people would like it to.
It doesn't take a rocket scientist to figure out one needs to avoid Chesapeake Energy (NYSE: CHK). Its shares have dropped over 50% in the last year and it has huge management issues on top of low gas prices. If one smells something rotten it is this company. The countries second largest producer with its aggressive drilling is part of the reason we have the glut problem. Hey they only lost $71 million in the first quarter. They have greatly curtailed production in hopes of reducing supply. It seems a little late for that.
EnCana Corporation (NYSE: ECA) has recovered some of its 50% drop in value over the past year. According to their 1st quarter results they made more money in commodity price hedging (358 million) then operating earnings (240 million). But they made money! They are aggressively expanding their exploration and development of oil, not natural gas, throughout their North American assets. They have over $2 billion in cash because of sound management decisions.
Exco Resources (NYSE: XCO) is another gas play whose stock price has fallen more than 50% in the past year. After releasing 1st quarter losses of more than $281 million, Exco's CEO Douglas H. Miller said, “as expected we completed a re-determination of our borrowing base with our lender group at $1.4 billion, which should provide adequate liquidity for our operations going forward. We shall seek to reduce our debt levels through asset sales, including all or part of our midstream assets, and sales or joint ventures of certain of our conventional assets.” I'll translate that for you. I hope things get better soon because we are going to burn through a lot of cash until they do.
Ultra Petroleum (NYSE: UPL) is my favorite of the four. They announced earnings this morning of almost $50 million or .32 a share. Although this is a decline from the last quarter they are still managing a profit under the depressed conditions of natural gas prices.
HERE IS WHY I WOULD WAIT
So why if there is a glut of natural gas do companies keep drilling? A large number of natural gas companies have leases that are HBP or Held By Production. If they don't have production they will lose the leases. So they keep on producing rather than lose their leases. Here is the worse case scenario. Natural gas has a fixed maximum capacity. Every year at the end of the winter heating season the refilling or “injection season” begins to replace depleted supplies. The U.S. Energy Department says it is 60% full compared to being 41% full at the same time last year. According to Wang and Zenker of Gas and Power Weekly Kaleidoscope this means that our storage facilities can only handle weekly injections of no more than 61 bcf (billion cubic feet) between now and the start of the next heating season. One problem, over the past five years the average has been 91 bcf per day! Okay here comes the “gloom” and “doom.” If we run out of capacity Wang and Zenker suggest the price could drop to $0 because, “the value of gas that cannot flow is essentially zero.”
When the dust settles for fundamental reasons I'd put my money on Ultra Petroleum and EnCana Corporation simply because of sound management that has a plan with the resources to implement it.
mwm102 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ultra Petroleum and has the following options: long JAN 2014 $30.00 calls on Ultra Petroleum, long JAN 2014 $40.00 calls on Ultra Petroleum, and long JAN 2014 $50.00 calls on Ultra Petroleum. Motley Fool newsletter services recommend Ultra Petroleum. 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.