A warm start to winter is disappointing investors who bet U.S. natural gas producers would offer a refuge from falling oil prices.
Gas companies including Southwestern Energy Co. and Range Resources Corp. have fallen by more than 40 percent since June. That’s similar to the decrease experienced in the past six months by companies producing mainly oil, as crude prices fell by half.
Gas prices last year had their first annual decline since 2011, dropping 32 percent. Futures settled at $2.882 per million British thermal units yesterday, a two-year low, after a mild summer reduced demand and early winter failed to produce frigid temperatures that would quickly eat away at stockpiles.
“The weather is the wild card,” said Karl Chalabala, a New York-based analyst for Canaccord Genuity Corp. “Weather has been the swing factor since the polar vortex started and then we’ve had the mildest summer in a very long time. There was no demand, and then this has turned out to be a mild winter.”
As West Texas Intermediate crude, the U.S. benchmark, began its drop from more than $100 a barrel to close to $50, gas prices on the Henry Hub declined at a slower rate and even climbed in November, before falling back as the year ended.
Energy stocks in the Standard & Poor's 500 Index fell 4 percent yesterday, contributing to its biggest drop since October. Among the 10 worst performers on the Standard & Poor’s 500 Oil & Gas Exploration & Production Index since June 20, seven are companies that produce more than 50 percent gas.
“There’s been no safe haven in natural gas,” Jason Stevens, director of energy research for Morningstar Inc., wrote in a Dec. 30 note to investors. “A warm winter has pressured gas-weighted stocks, leaving few alternatives for energy investors.”
Chesapeake Energy Corp., the second-largest U.S. gas producer, has declined 37 percent since June 20, when oil was $107.26 a barrel and gas was $4.53. Range has dropped 41 percent and Southwestern is down 45 percent.
Chesapeake declined to comment by e-mail. Range Resources didn’t respond to e-mail and phone messages seeking comment, and Southwestern declined to comment.
Americans were estimated to have used the least energy in five years to cool their homes this summer, according to the National Oceanic and Atmospheric Administration. A mild winter through December didn’t help, resulting in less use of the heating and power plant fuel than the five-year average, according to NOAA estimates.
Booming output from the Marcellus and Utica shale-gas plays in the northeastern U.S. isn’t going to stop anytime soon because companies can maintain profitability even if prices move toward $2, said James Sullivan, a New York-based analyst for Alembic Global Advisors. That also makes it unlikely company revenues will increase in the short term, he said.
Raymond James & Associates cut its forecast for average 2015 Henry Hub gas prices to $3 per thousand cubic feet from $3.65, citing normal weather that will “unmask the bearish underpinning of the U.S. gas market,” J. Marshall Adkins, an analyst at the company in Houston, said in a note to clients yesterday.
The gas market “looks terrible” for 2015 and “has been structurally oversupplied for years,” Adkins said.
Investors may be looking ahead to added demand for gas beginning later this year, when Cheniere Energy Inc. is set to begin the first exports from the U.S. shale boom. Cheap gas is also expected to result in increased demand from power plants.
“I wouldn’t sell these stocks here especially when it’s going to get better,” Chalabala said. “But it’s going to be a rough patch for a bit.”