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Two ways to play the 107% rally on natural gas

The oil sector has been in the spotlight lately after a spectacular rebound that has made it one of the top performers this year. However, it’s natural gas bulls that had a real ball with natural gas trading at its highest level since 2014, overtaking oil and many other commodities.

On Friday, natural gas futures rose 0.6% to $ 5.03 per million British Thermal Units (BTUs), the highest settlement price since February 2014. Natural gas prices are up 107.9% year-to-date while the greatest nat. Gas benchmark that US natural gas ETF, LP (NYSEARCA: UNG) is up 90.1% on the timeframe.

The natural gas bulls owe their impressive profits to rising gas demand and a supply shortage.

An unusually cold winter in Europe and a global recovery from Covid-19 have sparked strong demand and depleted natural gas supplies. Meanwhile, Hurricane Ida disrupted a significant amount of gas production, with 77% of oil and gas production in the Gulf of Mexico still offline. According to US government statistics, natural gas reserves are currently 17% lower than a year ago and 7% below the five-year average.

Here are 2 more ways to play the natural gas boom.

Natural gas (Henry Hub) USD / MMBtu

Source: Business Insider

#1. Buy Chesapeake

Commodity price hedging is a popular trading strategy that is often used by oil and gas producers and major consumers of energy resources such as airlines to protect themselves against market fluctuations. During times of falling crude oil prices, oil and gas producers typically use a short hedge to hedge the oil price if they believe prices will continue to fall in the future. Corresponding Tudor Pickering Holt & Co, through Barron’s, has hedged significant portions of fourth quarter cash flow for the majority of the energy companies it covers (around 85% hedged on average in the US).

Unfortunately, hedging also means that these companies cannot benefit from rising gas prices and can even lead to hedging losses.

However, some brave producers who bet on a raw materials rally only hedge themselves minimally or not at all.

Tudor Pickering Awards Chesapeake energy (NYSE: CHK) a Buy says the company remains one of the few producers who remain relatively unsecured.

This may seem like an odd choice given the Chesapeake history, but it kind of makes sense at this point.

Widely regarded as the fracking pioneer and king of unconventional drilling, Chesapeake Energy found itself in dire straits after taking on too much debt and expanding too aggressively. For years, Chesapeake raised large amounts of money to fund an aggressive expansion of its shale projects. The company was only able to get through rounds of sales (which management is reluctant to do), debt restructuring and M&A but could not prevent the inevitable – Chesapeake requested Chapter 11 in January 2020, making it the largest U.S. oil and gas producer to file for bankruptcy protection in recent years.

Thank God, Chesapeake has emerged successfully from bankruptcy this year with the ongoing raw materials rally, which offers the company an important lifeline.

The new Chesapeake Energy has a strong, low-leverage balance sheet and a much more disciplined CAPEX strategy.

The company aims at <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 improve its financial position significantly.

CHK stock has risen 35% since its comeback in March, significantly better than the 26% YTD gain Energy Select Sector SPDR Fund (NYSEARCA: XLE).

# 2. Buy Cimarex Energy

Meanwhile, Mizuho has chosen Cimarex energy (NYSE: XEC) as another stock to play the natural gas boom.

Mizuho upgraded XEC to buy from Neutral with a target price of $ 95, citing the company’s “now attractive free cash yield” following the company’s recent weakness and payout capacity of its merger with Cabot oil and gas (NYSE: COG).

Mizuho says the combined company will trade at an attractive value compared to oil companies and “only a small premium” to gas companies after the weakness since the announcement of the merger.

The balance sheets have improved significantly over the course of the year and the group has positioned itself for an attractive cash yield that is not just USD 65 / bbl but over the entire cycle“, Writes Vincent Lovaglio from Mizuho.

Natural gas already accounts for the majority of Cimarex’s production after its merger with Cabot, another primary natural gas. Gas producer.

Can the gas rally continue?

The multi-million dollar question is currently whether this rally has any legs after the spectacular price gains this year.

We think the rally may not have much momentum in the short term. According to the latest data from the Energy information management, Natural gas stocks rose last week +52 bcf vs. +40 bcf consensus and +20 bcf last week, suggesting the supply crisis is easing or demand is falling. The futures markets are also looking bearish, with front-month gas futures trading above $ 5 while futures expiring in a year are at $ 3.70, suggesting traders believe that the current high price level will not last.

Still, the long-term nat. Gas outlook remains positive thanks to strong LNG growth and the new role of natural gas as an energy bridge in the transition to renewables.

By Alex Kimani for Oil Genealogie

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