Natural Gas Endures a Rocky Week: Will it Regain Lost Ground?

The U.S. Energy Department's weekly inventory release showed an increase in natural gas supplies that effectively matched expectations. Despite the neutral inventory numbers, futures plunged 9% week over week, dragged down by weather forecasts and a spurt in production.

At the same time, there appears to be plenty of upside left for the commodity in 2022, supported by a strong liquefied natural gas (“LNG”) export trend and solid fundamentals. In this context, it would be wise to build a position in quality names such as EQT Corporation EQT, Cheniere Energy LNG and Chesapeake Energy CHK.

EIA Reports a Build Broadly In Line With Market Expectations

Stockpiles held in underground storage in the lower 48 states rose by 54 billion cubic feet (Bcf) for the week ended Sep 2, essentially tallying with the guidance of a 55 Bcf addition per the analysts surveyed by S&P Global Commodity Insights. While the increase was above last year’s injection of 48 Bcf for the same corresponding week, it was under the five-year (2017-2021) average net build of 65 Bcf.

The latest increment puts total natural gas stocks at 2,694 Bcf, which is 222 Bcf (7.6%) below the 2021 level at this time and 349 Bcf (11.5%) lower than the five-year average.

The total supply of natural gas averaged 105.7 Bcf per day, up 1.2 Bcf per day on a weekly basis, primarily due to higher dry production.

Meanwhile, daily consumption fell 1.6% to 93.5 Bcf from 95 Bcf in the previous week, mainly reflecting weaker power burn due to cooler weather on the East Coast and Midcontinent.

Natural Gas Registers Another Weekly Decrease

Natural gas prices tumbled last week despite the roughly in-line inventory build. Futures for October delivery ended Friday at $7.996 on the New York Mercantile Exchange, falling around 9% from the previous week’s closing. The decrease in natural gas realization — for the third straight week — is primarily the result of a boom in supplies and the prediction of mild weather.

Final Thoughts

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models anticipate light temperature-driven consumption over the near term (with a shift to hotter weather anticipated across much of the Lower 48), which is a negative for prices.

An increase in natural gas production has also kept the commodity in check. With the upstream operators finally responding to price incentives and ramping up volumes since last month, daily production recently topped 100 Bcf. This wave of new supply is expected to largely neutralize concerns that the market might enter the winter withdrawal season with gas in storage well below normal. Having said that, current inventories are still low and remain more than 11% below their five-year average.

The one thing supporting natural gas is a stable demand catalyst in the form of continued strong liquefied natural gas (“LNG”) feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record-high prices of the super-chilled fuel elsewhere. Now, with the Russia-Ukraine conflict, LNG has become even more coveted. As a matter of fact, earlier this year, the United States entered into a partnership with the EU to export additional LNG to wean the bloc off its dependence on Russian natural gas supplies. This means LNG deliveries are poised to rise further, especially with Moscow squeezing natural gas supplies to Europe by partly closing its key Nord Stream pipeline.

However, the possibility of protracted downtime associated with the fire breakout at the Freeport LNG export plant in Texas has drowned out most of the positives as of now. The Quintana, TX facility — responsible for around 15% of U.S. liquefaction capacity — was knocked offline by the Jun 8 blast and is expected to only partially restart in November. Consequently, some of the LNG cargoes due for export will have to be diverted to the domestic market despite huge demand abroad. The Environmental Protection Agency’s decision to deny an emissions limit waiver to the turbines used by leading LNG exporter Cheniere Energy in its Sabine Pass and Corpus Christi facilities also played spoilsport.

Investing Strategy

While fundamental indicators continue to suggest strong price levels, the natural gas market is currently quite unpredictable and spooked by the sudden rise in production and mild weather. As such, investors are rather unsure of what to do. As of now, the lingering uncertainty over the fuel means that they should preferably opt for fundamentally strong stocks like EQT Corporation, Cheniere Energy and Chesapeake Energy, which also carry a Zacks Rank of #1 (Strong Buy).  

You can see the complete list of today’s Zacks #1 Rank stocks here.

EQT Corporation is primarily an explorer and producer of natural gas, with a primary focus on the Appalachian Basin in Ohio, Pennsylvania and West Virginia. In terms of average daily sales volumes, EQT Corp. is the largest natural gas producer in the domestic market.

The company has an expected earnings growth rate of 329.4% for the current year. The Zacks Consensus Estimate for EQT’s 2022 earnings has been revised 20.8% upward over the last 60 days. EQT — valued at around $17.9 billion — has soared 151.8% in a year.

Cheniere Energy is valued at around $40.3 billion. LNG reported EPS of $2.90 in the second quarter, reflecting a 2.5% surprise over consensus.

Cheniere Energy has a projected earnings growth rate of 297.8% for the current year. The Zacks Consensus Estimate for the natural gas exporter’s 2022 earnings has been revised 18.1% upward over the past 60 days. LNG shares have climbed 77% in a year.

Chesapeake Energy has a premier natural gas portfolio with more than 15 years of inventory spread over some 2,200 locations. CHK — valued at some $12.4 billion — has a projected earnings growth rate of 88.7% for the current quarter.   

Chesapeake Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters. The stock has a trailing four-quarter earnings surprise of 24.5%, on average. CHK shares have rallied 65.7% in a year.

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