The oil sector has recently been the protagonist after a spectacular recovery that has made the sector one of the best results of the current year. However, it is the natural gas bulls that have had a real ball with the natural gas trade at its highest levels since 2014, surpassing oil and many other commodities.
On Friday, natural gas futures traded up 0.6%, to $ 5.03 per million British thermal units (BTUs), their highest liquidation price since February 2014. Natural gas prices rise 107.9% during the previous year, while the largest born. gas reference, the United States Natural Gas ETF, LP (NYSEARCA: UNG) has increased 90.1% in the long term.
Natural gas bulls have a growing demand for gas and a reduction in supply to appreciate the impressive gains.
An unusually cold winter in Europe, as well as a global rise in Covid-19, have caused strong demand and depleted natural gas inventories. Meanwhile, Hurricane Ida has eliminated a considerable amount of gas production, with 77% of oil and gas production still offline in the Gulf of Mexico. According to U.S. government statistics, natural gas inventories are currently 17% lower than a year ago and 7% below the five-year average.
Here are 2 more ways to play natural gas boom.
Natural Gas (Henry Hub) USD / MMBtu
Source: Business Insider
# 1. Buy Chesapeake
Commodity price coverage is a popular trading strategy often used by oil and gas producers, as well as heavy consumers of energy raw materials, such as airlines, to protect themselves from market fluctuations. In times of falling oil prices, oil and gas producers typically use short hedging to block oil prices if they believe prices are likely to fall further in the future. In accordance with Tudor Pickering Holt & Co. through Barron’s, most of the energy companies they cover, have covered significant parts of the fourth quarter cash flow (approximately 85%, covered on average in the US).
Unfortunately, coverage also means that these companies cannot enjoy the benefits of rising gas prices and in fact can cause loss of coverage.
However, some bold producers are betting on a rally coverage of commodities only minimally or not at all.
Tudor Pickering rates Energy Chesapeake (NYSE: CHK) to Buy, saying the company it remains one of the few producers that remains relatively uncovered.
This might turn out to be a strange choice given Chesapeake’s story, but it somehow makes sense right now.
Widely regarded as a pioneer of fracking and the king of unconventional drilling, Chesapeake Energy has been in trouble after taking on too much debt and expanding too aggressively. For years, Chesapeake applied for large loans to fund an aggressive expansion of its shale projects. The company only managed to survive through rounds of asset sales (which management is opposed to), debt restructuring and M&A but he could not avoid the inevitable – Chesapeake asked Chapter 11 in January 2020, becoming the largest oil and gas producer in the United States that sought protection against bankruptcy in recent years.
Fortunately, Chesapeake successfully came out of bankruptcy this year, with the ongoing commodity rally, which offers the company a major lifeline.
The new Chesapeake Energy has a strong balance sheet with low leverage and a much more disciplined CAPEX strategy.
The company is oriented <1x long-term leverage in a bid to preserve balance sheet strength, target production is 400+ thousand barrels / day and intends to limit CAPEX to $700-750 million of annual capital expenditures and positive FCF. CHK says it expects to generate >FCF $ 2 billion over the next 5 years, enough to significantly improve its financial position.
CHK shares have risen 35% since their return in March, significantly better than YTD’s 26% gain in YTD. SPDR fund of the selected energy sector (NYSEARCA: XLE).
# 2. Buy Cimarex Energy
Meanwhile, Mizuho has chosen Cimarex Energy (NYSE: CHEC) as further action for the natural gas boom.
Mizuho has updated XEC to buy at Neutral with a $ 95 price target, citing the company’s “now attractive free cash performance” following the recent weakness and ability to pay for its merger with Cabot Oil & Gas (NYSE: COG).
Mizuho says the combined entity is trading at an attractive value compared to oil pairs and with “only a small premium” against gas pairs after weakness since the merger announcement.
“The balance sheets have improved significantly in YTD, placing the group to obtain an attractive cash return not only at $ 65 / bbl, but also throughout the cycle, and we remain very constructive for this reason, with an average rise of 46% in our oil coverage“, Writes Vincent Lovaglio de Mizuho.
Natural gas already makes up the majority of Cimarex’s production, which should rise even further after its merger with Cabot, another primary native. gas producer.
Can the gas concentration continue?
The question of a million dollars right now is whether this rally still has to run after this year’s spectacular gains.
We believe that the concentration may not have too much steam in the short term. According to the latest data from the Energy information management, natural gas inventories rose last week +52 bcf against the consensus of +40 bcf and +20 bcf last week, suggesting that supply reduction is declining or demand is declining. Futures markets also look bearish, as the previous month’s gas futures are trading above $ 5, while futures that will expire in a year will stand at $ 3.70, suggesting traders believe that current high price levels will not last.
However, the long-term born. the gas outlook remains bright thanks to strong LNG growth and the new role of natural gas as an energy bridge during the shift to renewable energy.
By Alex Kimani for Oilprice.com
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