Gas Firms Rally on Signs Glut Is Easing – Wall Street Journal

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Shares of natural-gas producers, among the market’s worst performers in recent years, are now among the top performers on signs that a glut could shrink soon.

Natural-gas prices, which had slumped since 2008, plunged more than 60% from 2014 to early this year. Stock prices for gas companies began to plummet in 2014, too, as investors worried that the shale boom had oversupplied the market.

Indications that supply was easing helped natural-gas prices rebound 31% over the past two months, after hitting new lows in March. The price gains have boosted shares of companies like Southwestern Energy Co.
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and Range Resources Corp.
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, now up more than 65% year to date.

Overall, four of the nine top-performing S&P 500 stocks this year are natural-gas producers, making them among the best-returning commodity stocks and outshining their peers in oil.

The question now is whether the rally marks the start of a powerful turnaround in gas prices, supported by deep cuts from producers, or a short-lived surge based on optimistic forecasts.

Dan Pickering, co-president of Tudor, Pickering, Holt & Co. in Houston, who oversees $1.9 billion in investments for the bank’s asset-management arm, believes more gains are coming. Last year, the firm made gas producer Rice Energy Inc.
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one of its largest bets among exploration and production companies. Mr. Pickering said shares in natural-gas producers and other energy companies can gain an additional 50%.

“If you have to be in or out, you should be in,” he said.

David Tepper is in. His hedge-fund firm, Appaloosa Management LP, late last year bought shares of gas companies like Southwestern Energy, Range Resources and Cabot Oil & Gas Corp.
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, according to FactSet.

So is Greenlight Capital. David Einhorn’s firm has a 29.6 million-share position in Consol Energy Inc.,
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according to FactSet. Returning 82% this year, Consol leads nearly all U.S. producers. Shares are still down about 60% from when Greenlight started buying in 2014.

To many others, though, gas looks speculative and oversupplied. Stockpiles rose to a record for the beginning of spring. Continental U.S. production reached record output of 73.3 billion cubic feet a day in February and has budged 3% from that level, according to Platts Analytics.


Gas companies’ success in developing fracking for new wells became a burden when their efforts greatly oversupplied the market. Spot prices in the first quarter were down 61% from their recent peak in the first quarter of 2014, according to government data. Shares of Range Resources, Consol and rival EQT Corp.
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had big declines last year after tapping some of the biggest gushers in U.S. history.

“If you look at the fundamental picture, nothing has changed,” said Keith Weissman, analyst at hedge fund Sibilla Capital Management LLC, with $160 million in assets under management. “You still have plenty of supply that could come back online at almost a moment’s notice.”

Many other commodities started to rally in February, boosted by a weakening dollar and low global interest rates. But U.S. gas, used primarily for home heating and power generation, is almost entirely a domestic trade and didn’t benefit from those global factors.

Instead, natural-gas prices kept falling when record-high winter temperatures sapped demand for heating fuel. Gas prices hit a 17-year low in March, and shares of natural-gas companies fell hard alongside them.

Collapsing gas prices contributed to two of the biggest bankruptcies in the U.S. energy sector. Power producer TXU Corp., now known as Energy Future Holdings Corp., and oil-and-gas explorer Samson Resources Corp. filed for bankruptcy protection in 2014 and 2015, respectively.

Bearish gas positions by commodity investors still outweigh bullish positions by 36%, according to the Commodity Futures Trading Commission. But investors in April shrank that bet on falling prices to its weakest point in a year.

Analysts recently lowered their price forecasts for the rest of the year but said that will lead to a sharper rebound in 2017. Some predict supply declines will push prices up as much as 69%. Recent delays on big pipeline projects could limit new supplies. Lenders are also cutting back on the loans that had funded rampant growth.

Budget cuts have trimmed the number of active gas rigs to a record 86, down 76% from a recent peak in November 2014. That can cause production to fall as older wells dry up. A decline in new drilling starting 18 to 24 months ago should lead to falling production later this year or in 2017, said Société Générale SA analyst Breanne Dougherty.

That can jolt prices higher, said Chris Bertelsen, chief investment officer at wealth-management firm Global Financial Private Capital, who bought shares in gas producers this year.

“These fracked wells have pumped a little more and a little longer than everybody’s expected. But they tail off fast,” said Mr. Bertelsen, whose firm manages $5.8 billion in assets. “I really do think…that we’ve seen a bottom in natural gas.”

Write to Timothy Puko at tim.puko@wsj.com and Nicole Friedman at nicole.friedman@wsj.com