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Buoyant Natural Gas Lifts Stocks

BySimon Lack
Published 09/11/2012, 02:24 PM
Updated 07/09/2023, 06:31 AM
BHP
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BHPB
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RRC
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NG
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CAPX
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CRK
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RRS
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Natural gas is up 6% today, in part, no doubt, because inventories are being replenished at a slightly faster pace compared to the past five years, according to the Energy Information Agency (EIA). Of course last year's mild winter is sure to lead to another excess of supply, although the ongoing switch from coal to gas in energy production is leading to a permanently higher level of underlying demand.

Acquisition Talk
As a result, many natural gas names including Range Resources Corp. (RRC) and Comstock Resources Inc. (CRK), both of which we own in our Deep Value Equity strategy, are higher today. In addition, Bernstein Research initiated coverage on RRC with a buy recommendation. RRC claims potential resources of up to 60 TCF (Trillion Cubic Feet), enough to supply the U.S. for almost three years. The capex requirements to exploit a fraction of this are beyond RRC’s current capability, which is why we think ultimately they’ll be acquired by a far larger company. However, BHP Billiton (BHO) bought Petrohawk last year for $12.1BN and just recently had to take a $3.3Bn write down on assets predominantly including natural gas. So other potential acquirers may be cautious about overpaying for assets in what is likely to remain a well-supplied domestic natural gas market for the foreseeable future.

Nonetheless, a price closer to $4 per MCF rather than $3 seems likely over the long run given where the fully-loaded marginal cost of production is. And low-cost producers such as RRC should be able to continue their production growth under those circumstances.

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