Natural Gas Creating Problems

Lower natural gas prices might be good for your wallet, but not for your portfolio.

Yesterday, the Energy Department predicted that home heating bills will be 8% lower this winter than last winter. Consumers using natural gas or propane will see the biggest drop. These savings will occur even though the Farmer's Almanac predicts, "A winter during which temperatures will average below normal for about three-quarters of the nation."

The reason is natural gas inventories. Last week, the U.S. Energy Information Administration said storage levels reached an all-time high of 3.589 trillion cubic feet. A cool summer combined with a recession helped to cut supply.

Inventories could rise even further. Baker-Hughes calculates that the number of natural gas rigs has risen during 10 out of the last 11 weeks. At the same time, heating season has yet to start.

As a result, natural gas prices remain significantly down. Even with a recent rebound, natural gas futures are trading at just $5.048 MMBtu, versus over $6 last winter.

Some Analysts Cutting Forecasts

The expected increase in natural gas inventories has some analysts rethinking their earnings forecasts for exploration & production (E&P) companies. During the past two weeks, cuts have been made to full-year 2009 profit projections on Apache (APA - Analyst Report), Bill Barrett (BBG - Snapshot Report), EOG Resources (EOG - Analyst Report), Petrohawk (HK - Snapshot Report) and Ultra Petroleum (UPL - Snapshot Report).

However, the cuts are not universal. Other analysts have actually raised their 2009 profit forecasts on these companies. Still, negative revisions outnumber positive revisions.

Forecasts for 2010 only complicate the picture. The Zacks Consensus for all 5 companies is rising, though not all of the covering analysts are in agreement that actual profits will be higher than currently forecast.

For investors, the lack of agreement suggests that the risk of holding E&P stocks is elevated. Should natural gas inventories continue to rise, winter temperatures turn out to be warmer than expected or the dollar rebounds, natural gas prices would likely fall. This would, in turn, place additional pressure on profit forecasts.

APA, BBG, EOG, HK and UPL are all Zacks #3 Rank ("hold") stocks. They are classified in Oil-U.S. Exploration & Production.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.