No major commodity had a worse 2019 than natural gas. The fuel endured a torrid year, registering its worst annual decline since 2014. Prices tumbled more than 25% last year, falling to multi-year lows of around $2.1 per MMBtu in between, as buyers fled the market over growing worries about record output, soaring flaring levels and concerns of an ongoing supply glut.
Let’s look back at the reasons behind natural gas’ underwhelming year:
Overwhelming Production: The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 37%, from 25% in 2011. Moreover, new pipelines to Mexico, together with large-scale liquefied gas export facilities have meant that exports out of the U.S. are set for a quantum leap. Finally, higher consumption from industrial projects will likely ensure strong natural gas demand.
But thanks to soaring shale output, the United States has been the world's largest natural gas producer since 2009. Higher recovery rates from major unconventional fields have helped unleash record volumes regularly. As a matter of fact, the EIA forecasts that the United States is likely to have produced 92.1 billion cubic feet a day (Bcf/d) of dry natural gas in 2019, up from the 2018 average of 83.4 Bcf/d - a record high for the second consecutive year. The agency also projected that domestic gas output would rise to an all-time high of 95.1 Bcf/d in 2020. In other words, record high production in the United States and expectations for healthy growth through 2020 means that supply will keep pace with demand.
Rising Inventories: According to the U.S. Energy Department's latest weekly inventory release, stockpiles held in underground storage in the lower 48 states are at 3.192 trillion cubic feet (Tcf) - 484 Bcf (17.9%) above 2018 levels at this time. In fact, supplies are up significantly this year, surging from a low point of 1.107 Tcf in March to more than 3 Tcf now.
Worryingly, high inventories heading into peak winter demand season has raised concerns about excess supply.
Significant Flaring: While oil production in shale basins like the Permian, Eagle Ford and North Dakota have seen a rapid rise since 2016, it is accompanied by structural challenges like natural gas flaring. Operators are experiencing some growing pains as natural gas output – a largely unwanted derivative that emerges alongside oil production in the region – outpaces gathering and processing capacity, leading to increased flaring. The flaring, leads to greenhouse gas emissions like methane. Therefore, the operators can either ‘self-restrict’ oil production until more natural gas infrastructure is built or pay others with space on existing pipelines to transport the unwanted gas. As companies are reluctant to stop drilling for oil, they continue to ‘flare’ natural gas unabated.
Per independent energy research and business intelligence company Rystad Energy, operators burnt off around 750 million cubic feet per day of the commodity each day in the Permian during the third quarter – an all-time high. The huge amount of associated gas production is a prime reason to drag down prices.
Outlook for 2020 Riddled With Uncertainty
Natural gas might experience short-lived surge based on positive weather forecasts but any powerful turnaround looks unlikely at the moment. With gas output in the lower 48 states recently hitting a record 92.8 Bcf per day, there is little room for prices to improve meaningfully from their current levels of $2.13 per MMBtu.
True, shale production growth is expected to slow this year but prices are unlikely to eclipse the psychologically $3 threshold on a sustainable basis, if at all, as upstream players will look to add volumes as prices improve.
The bearish natural gas fundamentals and its seasonal nature is responsible for the understandable reluctance on investors’ part to dip their feet into these stocks. In fact, most gas-focused names took a pounding last year. Shares of EQT Corporation (EQT - Free Report) , SilverBow Resources, Inc. (SBOW - Free Report) , Montage Resources Corporation (MR - Free Report) , Gulfport Energy Corporation (GPOR - Free Report) , Southwestern Energy Company (SWN - Free Report) etc. – all carrying a Zacks Rank #3 (Hold) – have fallen somewhere between 40% and 65% over the past 12 months. Some like Cabot Oil & Gas Corporation (COG - Free Report) is further down the pecking order, with a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
If you are still looking for a natural gas play this year, CNX Resources Corporation (CNX - Free Report) might be a good selection. The Canonsburg, PA-based company – with a Zacks Rank #2 (Buy) – has seen the Zacks Consensus Estimate for 2020 jump 127% over 60 days.
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