We have written a number of reports on natural gas and the rebound in the prices of the fuel since mid-June 2012. The drastic decrease in the prices of natural gas has been a phenomenon in North America; prices have decreased from around $10 per mmbtu in July 2008 to below $2 per mmbtu in April 2012.
This abnormal decrease in natural gas prices is primarily due to the shale gas boom in the U.S., with the introduction of hydraulic fracturing and horizontal drilling for the extraction of tight gas from rock formations. The extraction of shale gas led to excess supply in North America, which outpaced demand and led to the drastic decrease in natural gas prices.
Another factor contributing to the excessive decrease in natural gas prices was the fact that natural gas was landlocked in America, since it is not economical to transport the fuel in its gaseous form. Recently, there have been developments in the region to convert natural gas to liquefied natural gas, making its transport more economically viable.
With natural gas prices trading at such a high discount to historical prices and other fuels, there has been a consumer shift towards natural gas. Electric utilities have witnessed the largest shift in fuels used and have substituted their coal-fired engines for engines that use natural gas, which are cheaper and are environmentally friendly.
The summer of 2012 has been one of the hottest summers witnessed in North America, increasing the demand for air conditioning and electricity in the region. Another development witnessed in North America has been the shift from pure natural gas shale plays to oil-and-liquid shale plays, as the prices of natural gas had dropped to levels that were economically not viable to produce shale gas, and this can be seen from the decreasing gas rigs in the U.S.
These factors have led to natural gas prices (Henry Hub Spot) to rebound from their decade low of $1.84 per mmbtu to trade at $3.09 per mmbtu.
Companies Expected to Benefit
With natural gas prices rebounding to above $3 per mmbtu, we are of the view that most producers of shale gas in the U.S. would likely benefit from increased revenue and profitability. We again highlight three companies in this regard: Chesapeake Energy Corp. (CHK), Apache Corp. (APA) and Devon Energy Corp. (DVN).
Chesapeake is an independent driller and producer of natural gas, oil and natural gas liquids, with operations only in the U.S. Its production mix is 78% Natural Gas, 6% Oil and 16% Natural Gas Liquids. Chesapeake has an aggressive CAPEX plan going forward, and will face a funding gap in 2012 and 2013 of $11 billion and $5 billion, respectively, and the company intends to liquidate its gas producing assets to cover this funding gap.
The company announced that it sold Chesapeake Midstream Partners LP for $2 billion, which resulted in a pre-tax gain of $1 billion; it also announced that it was in the process of selling certain mid-continent gathering and processing assets. Also, the company has announced that it intends to reduce its operating expenditure to increase its cash base.
The stock is trading at a forward P/E multiple of 19.6x and offers a dividend yield of 1.9%. The stock performance for 1 month, 3 months and YTD are 0.75%, 0.11% and 17.88%. For a detailed analysis on the stock, please review our report "Is Chesapeake Energy A Turnaround Story?"
Apache is an independent energy company and drills, explores and produces natural gas, oil and natural gas liquids, with operations in Argentina, Australia, Canada, Egypt, and offshore of the U.K and the U.S. The production mix of Apache is 50% Natural Gas and 50% Oil and Natural Gas Liquids.
The company witnessed record production of 769,000 barrels of oil equivalent (BOE) in the first quarter of 2012, as compared to 732,000 BOE in the same period last year. Apache's production for the first quarter of 2011 included production of about 11,000 BOE from assets in Canada and East Texas in the U.S. that were disposed of. The adjusted earnings witnessed an increase of 3% due to its worldwide production exposure, despite low natural gas prices in the U.S.
The stock is trading at a forward P/E multiple of 7.8x and offers a dividend yield of 0.81%. The stock performance for 1 month, 3 months and YTD are 0.36%, 8.72% and 3.32%, respectively.
Devon is an independent energy company involved in the exploration and production of oil and natural gas and natural gas liquids, with operations in Canada and the U.S. Devon has proven reserves of about 3 billion BOE, of which about 58% are natural gas. The production for the first quarter of 2012 came to about 694 MBOE and the production mix was 63% Natural Gas, 21% Oil and 16% Natural Gas Liquids.
The company achieved 117% growth from its North American onshore production, and it has witnessed a decrease in its revenue and profitability due to low natural gas prices in the U.S. Devon intends to increase its liquid production and change its production mix to 48% Gas, 32% Oil and 20% Natural Gas Liquids, which will be a positive for the company.
The stock is trading at a forward P/E multiple of 12.2x and offers a dividend yield of 1.4%. The stock performance for 1 month, 3 months and YTD are 1.53%, 15.71% and 5.03%, respectively.