For Immediate Release
Chicago, IL – January 6, 2012 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Chesapeake Energy (CHK - Analyst Report), EOG Resources Inc. (EOG - Analyst Report), Southwestern Energy (SWN - Analyst Report), Baker Hughes Inc. (BHI - Analyst Report) and ExxonMobil (XOM - Analyst Report).
Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513
Here are highlights from Thursday’s Analyst Blog:
Will Nat Gas Rebound This Year?
Among the most commonly asked questions by energy investors this new year is: will low natural gas prices continue in 2012 or will we see a durable rebound in prices from their multi-year plight?
From a peak of about $13.60 per million British thermal units (MMBtu) in 2008 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana) to around $3.00 now – sinking in between to a low of $2.50 in September 2009 – the plummeting value of natural gas represents a decline of over 75% over three years. In fact, prices have been low, roughly around $4.00 per MMBtu, during this timeframe. Thanks to this steep fall, industry participants are pressing the panic button.
But It Hasn’t Always Been This Way…
It wasn’t long ago that the nation was facing a real natural gas supply shortage, which sent prices on a tear. It is almost impossible to imagine that things once looked so miserable on the U.S. natural gas supply front that plans were made to invest money in liquefied natural gas (LNG) import terminals to bring in natural gas from overseas. This commodity shortage meant that natural gas was in a raging bull market in 2005 and in 2008, with prices skyrocketing.
Factors Behind the Decline
But then something happened; the success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations, or shale formations. This unconventional fuel source transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.
With the advent of hydraulic fracturing (or fracking) – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves.
As a result, once faced with a looming deficit, natural gas is now available in abundance. Through their technical advancements, independent producers like Chesapeake Energy (CHK - Analyst Report), EOG Resources Inc. (EOG - Analyst Report), Southwestern Energy (SWN - Analyst Report) and their ilk were actually so successful in pumping up natural gas volumes that it rocked the price of the product that they were selling.
So while most commodities have at least doubled in price over the last 3–5 years, natural gas prices have not recovered. In fact, they are currently trading at their lowest level in more than two years.
What’s surprising is that even the recent, steady fall in the natural gas rig count has failed to stem the rise in natural gas production.
Defying Rig Count
Every week, Houston-based oilfield services company Baker Hughes Inc. (BHI - Analyst Report) releases a rig count, tallying the number of rigs searching for oil and gas in the country. And after analyzing the numbers, we find that the natural gas rig count has been falling since the last few weeks, 125 rigs in fact (or 13%) from its recent high of 934 on October 28.
Now, as per conventional thinking, this (a lower rig count) would indicate that a significant production decline is positively on the horizon. However, this is not as simple a conclusion as it might seem, if we look at the U.S. production and the shift in rig composition.
With horizontal rig count – the technology responsible for the abundant gas drilling in domestic shale basins – close to its record high, output from these fields remains robust. As a result, gas inventories still remain at elevated levels – 13.7% above the 5-year average and 9.1% higher than the same period last year.
Fundamentals Don’t Back a Big Move in 2012
Looking ahead, EIA expects average total production to rise by 2.8% in 2012 (to an all-time high 67.72 billion cubic feet per day, easily eclipsing 2011's record high estimate of 65.9 billion cubic feet per day), while total natural gas consumption is anticipated to grow by just 1.7% next year. We believe these supply/demand dynamics – the projected lower consumption growth compared to production – will weigh on natural gas prices, translating into limited upside for natural gas-weighted companies and related support plays.
In the absence of major production cuts or a stronger economy to boost industrial demand, which is responsible for almost a third of the gas consumption, we do not expect much upside in gas prices in the near term. In other words, there appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumpster in 2012.
In the past, winter weather has played a factor in boosting prices with demand for domestic natural gas exceeding available supply. But with no dearth of new supply, even this association is becoming more and more obsolete.
Where's the Opportunity Now?
With the industry average production cost at around $5 per MMBtu and natural gas hovering around the $3.00 range, most of the producers are close to or below their break-even. Even big companies like Chesapeake have seen their share prices erode. As such, we can see why investors are scared to dip their feet into natural gas stocks.
However, some (like Chesapeake) are better equipped than others and this is because of their initiative of deploying more funds toward liquids. One can also opt for large gas producers like ExxonMobil (XOM - Analyst Report) and that have the deep pockets to wade through the rough waters.
Another way to play the market is to look for the lowest producers of natural gas. These include firms like Southwestern, with substantially lower production costs. These companies will get the best results when natural gas finally rallies and be the ones who will stay afloat the longest if prices stay low.
Want more from Zacks Equity Research? Subscribe to the free Profit from the Pros newsletter: http://at.zacks.com/?id=5515.
About Zacks Equity Research
Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.
Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.
Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=5517
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leon Zacks. As a PhD from MIT Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5518.
Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Follow us on Twitter: http://twitter.com/zacksresearch
Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.
Zacks Investment Research
800-767-3771 ext. 9339