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Natural Gas Hits a 9-Month High: What's Driving the Rally?

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The onset of hotter weather has helped lift natural gas prices by nearly 75% since late June, when they hit their lowest level since 1995. With the commodity being the primary U.S. power plant fuel, firms in natural gas business have gained from the bump in cooling demand.

Already on the back of a scorching June and July, and continued heat wave in August, natural gas has experienced a ramp up in air conditioning use. Riding on this positive momentum, prices ended the day at a nine-month high of $2.579 per MMBtu. 

Supportive Weather

With the updated weather data revealing an ongoing bullish pattern extending into September — particularly in west and southwest — cooling loads should experience a consistent upward spike.

The extension of summer heat has translated into the burning of more gas to feed higher electricity consumption for air conditioning. According to the EIA's latest Short-Term Energy Outlook, natural gas’ share of electricity generation would rise to 40% this year from 37% in 2019. Therefore, as Americans crank up their air conditioning to combat hotter-than-normal weather, companies in the natural gas industry stand to make more money.

This should also significantly reduce the current inventory surplus that remains bloated due to a combination of weak consumption from a warmer-than-expected 2019-2020 winter, coronavirus-induced drop off in usage and a dip in volumes flowing to LNG export plants. As of Aug 21, natural gas stockpiles held in underground storage in the lower 48 states stands at 3.420 trillion cubic feet (Tcf) — 580 Bcf (20.4%) above the 2019 levels at this time and 438 Bcf (14.7%) higher than the five-year average.

While certain regions are likely to witness lower-than-normal temperatures on account of the Hurricane Laura-accompanied storm and rainfall, most of the country will see a continuation of this warming trend over the next few weeks. Consequently, the storage surplus is expected to shrink and push prices even higher. This bodes well for companies that develop and sell natural gas. 

Other Positives

The novel coronavirus outbreak remains a big catalyst for balancing the natural gas market. Analysts believe that the brake in skyrocketing shale oil production growth — tied to the crude price collapse — will also limit associated gas output, thereby cutting the massive supply glut. As a proof of the impending supply drop, the EIA expects that the United States to churn out 88.7 billion cubic feet a day (Bcf/d) of dry natural gas this year, down from the 2019 average of 92.2 Bcf/d.

The U.S. natural gas rig count, an indicator of future production, also points to the same. According to Baker Hughes (BKR - Free Report) , the gas rig count continues to decline, recently falling to a record low of 68 from more than 160 a year ago.

Finally, the steady improvement in shipments of LNG for export will facilitate the natural gas market. Volumes flowing to LNG export plants recently dropped to multi-month lows due to weak international demand. However, there has been a sustained increase in feed gas volumes over the past few weeks on the back of a better demand outlook. This is likely to translate into rising LNG shipments in August — the first in six months and a bullish demand factor for U.S. natural gas prices.

Focus on These Gas-Heavy Names

Favorable weather forecasts across most of the lower 48 over the next few weeks are likely to spur natural gas’ demand for cooling, and therefore prices, at least for the near term. The upward trend should aid gas-weighted producers. We present five companies that investors should watch out for.

SilverBow Resources, Inc. (SBOW - Free Report) : A pure-play upstream operator in the Eagle Ford Shale in South Texas, SilverBow Resources is a natural gas-focused E&P company. Over 30 days, the Zacks Rank #1 (Strong Buy) company has seen the Zacks Consensus Estimate for 2020 increase 23.5%. SilverBow controls 165,000 net acres in the Eagle Ford and 79% of its total output comprises natural gas.

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

Range Resources Corporation (RRC - Free Report) : The company, carrying a Zacks Rank #3 (Hold), has a strong footing in the prolific Appalachian Basin. In the gas-rich resource, the upstream firm has huge inventories of low-risk drilling sites that are likely to provide production for several decades. About 70% of the company’s total output is natural gas. Over 30 days, Range Resources has seen the Zacks Consensus Estimate for 2020 increase 73.9%.

Gulfport Energy Corporation (GPOR - Free Report) : The company's asset base — primarily focused on natural gas — is concentrated on the Utica Shale of Ohio and the SCOOP play in Oklahoma. Gulfport has a combined inventory in excess of 3,000 gross drilling locations in its two primary plays. Of Gulfport’s total output, nearly 90% comprises natural gas. Over 30 days, the #3 Ranked company has seen the Zacks Consensus Estimate for 2020 increase 58.3%.

Cabot Oil & Gas Corporation (COG - Free Report) : Cabot is an independent gas exploration company with producing properties mainly in the continental United States. The company — with a Zacks Rank of 3 — owns 174,000 net acres in the dry gas window of the Marcellus play. Cabot beat the Zacks Consensus Estimate in two of the last four quarters, missed in one and reported in line in the other, delivering an earnings surprise of 14.83%, on average. All of Cabot’s production is natural gas.

CNX Resources Corporation (CNX - Free Report) : CNX Resources is a leading operator in the Appalachian basin — the most prolific domestic gas basin — with more than 1.1 million net acres. About 96% of the company’s total output is natural gas. The 2020 Zacks Consensus Estimate for this Zacks Rank #3 company indicates 86.5% earnings per share growth over 2019.

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