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Natural Gas Endures a Rocky Week: What's Behind the Selloff?

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The U.S. Energy Department's weekly inventory release showed a decrease in natural gas supplies in line with projections. Despite the neutral inventory numbers, futures were down 6% week over week, hurt by weather forecasts, indicating above-normal temperatures over most of the country in the coming days.

With the recent price movement making it difficult for investors to be optimistic about the space, it would be wise to hold on to fundamentally sound gas-weighted producers SilverBow Resources (SBOW - Free Report) , Range Resources (RRC - Free Report) and Comstock Resources (CRK - Free Report) .

If you are still looking for near-term natural gas plays, Chesapeake Energy (CHK - Free Report) might be a good selection.

EIA Reports a Withdrawal In Line With Market Expectations

Stockpiles held in underground storage in the lower 48 states fell by 88 billion cubic feet (Bcf) for the week ended Dec 10 – matching the guidance given by analysts surveyed by S&P Global Platts. However, the decrease was below last year’s pull of 118 Bcf for the same corresponding week and the five-year (2016-2020) average net shrinkage of 114 Bcf.

The fourth successive draw of the winter heating season puts total natural gas stocks at 3,417 Bcf, which is 326 Bcf (8.7%) below the 2020 level at this time and 64 Bcf (1.8%) lower than the five-year average.

The total supply of natural gas averaged 100.8 Bcf per day, edging up 0.4% on a weekly basis due to higher dry production.

Meanwhile, daily consumption fell 1.4% to 108.8 Bcf from 110.4 Bcf in the previous week, primarily reflecting weaker demand from the residential/commercial sector on the back of above-normal temperatures prevailing in a number of locations across the nation.

Natural Gas Registers a Weekly Decline

Natural gas prices trended downward last week despite the as-expected inventory withdrawal. Futures for January delivery ended Friday at $3.69 on the New York Mercantile Exchange, falling around 6% from the previous week’s closing. The decrease in natural gas realization is primarily the result of a warmer-than-normal weather outlook (and the subsequent lull in heating demand) for the remainder of this month.

Final Thoughts

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models anticipate milder temperature-driven consumption in December, which is a negative for prices. Apart from the lull in heating demand around this time of the year, there is also the issue of a steady rise in dry gas production levels.

Yes, there 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 higher prices of the super-chilled fuel elsewhere. Most analysts believe that deliveries appear poised for further gains this year and the next on surging consumption in Europe and Asia, especially as we head deeper into winter. The circumstances are particularly dire in Europe where gas supply is running low with the need for a steady refill from the United States ahead of the peak winter period. At the same time, promised flows from Russia have been limited.

But even the resilience in LNG exports cannot offset the ill-effects of a mild domestic weather pattern. With forecasters calling for less-than-normal heating needs in December, there is a high possibility of muted withdrawals in the next few weeks. This has largely neutralized apprehensions that the market might face a supply shortage by the time winter is over.

The strong inventory build and a warm December outlook has brought back prices under the $4 threshold after recently topping $6 MMBtu for the first time since 2014 and reaching a 13-year high settlement of $6.312 in October.   

Investing Strategy

With the natural gas market being unpredictable and spooked by mild weather, investors are quite unsure what to do. As of now, the lingering uncertainty over the fuel means that investors should preferably wait for a better entry point before buying shares in natural gas-focused companies SilverBow Resources, Range Resources and Comstock Resources.

SilverBow Resources is valued at around $339 million. The Zacks Consensus Estimate for SBOW’s current-year earnings has been revised 10.6% upward over the last 60 days. The company’s shares have rocketed 284% in a year.

SilverBow Resources — carrying a Zacks Rank #3 (Neutral) — reported EPS of $2.69 in November, a 30% surprise over consensus. SBOW beat the Zacks Consensus Estimate for earnings in three of the last four quarters but missed once. It has a trailing four-quarter earnings surprise of roughly 1.5%, on average.

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

Range Resources has an expected earnings growth rate of 2,533.3% for the current year. The Zacks Consensus Estimate for RRC's current-year earnings has been revised 14.7% upward over the last 60 days.

Range Resources, valued at around $4.7 billion, carries a Zacks Rank of 3. RRC has soared 162% in a year.

Comstock Resources has a projected earnings growth rate of 508.7% for the current year. The Zacks Consensus Estimate for Zacks Rank #3 CRK’s current-year earnings has been revised 10.2% upward over the last 60 days.

Comstock Resources beat the Zacks Consensus Estimate for earnings in three of the last four quarters and met once. It has a trailing four-quarter earnings surprise of roughly 42.5%, on average. CRK shares have gained around 89.4% in a year.

Having said all of this, we believe that the fundamentals of natural gas appear to be relatively tight for now. Also, Europe and Asia’s insatiable demand for LNG has put a floor beneath prices for the time being. Finally, should weather models flip materially colder, there’s massive upside on the table. If that turns out to be the case, investors will do well to take a position in Chesapeake Energy.

Chesapeake Energy has a projected earnings growth rate of 121.4% for the current year. CHK's consensus estimate for the current year has been revised 16.1% upward over the last 60 days.

Chesapeake Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters. The Zacks Rank #1 (Strong Buy) stock has a trailing four-quarter earnings surprise of roughly 23.1%, on average. CHK shares have rallied around 47.8% in a year.

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