In his mid-year commodity outlook, Elliott Gue, editor of Energy and Income Advisor, looks at the prospects for the natural gas sector and assesses the impact that politics will — or won't — have on this sector.
Short term into September-October, we see US natural gas prices remaining generally rangebound. We’re mildly bullish on gas into early 2025 due to the prospect for, at least, a more normal winter amid La Nina.
In my view, the key to longer term US gas prices can be summed up in a single word: Louisiana. The Haynesville Shale centered in Louisiana represents the key swing supply of US gas for LNG export. That’s because Louisiana and neighboring Texas are home to virtually all current and planned US LNG export capacity and proximity reduces transportation costs and eases infrastructure constraints faced by more distant Appalachian producers.
The Haynesville is a vast resource, though costs are higher than in Appalachia. To incentive Haynesville production, we’ll need to see longer-term US gas prices average around $4.00/MMBtu, a level that allows producers in the region to generate healthy free cash flow.
In terms of stocks, our favorite producers like EQT Corp. (EQT) and Chesapeake Energy Corp. (CHK) have low production costs and cash flow breakevens as well as significant near-term hedge coverage to insulate cash flows from weak near-term gas prices.
At $3.50 to $4.00/MMBtu or higher, consistent with the calendar strip for gas next year and our outlook, EQT and Chesapeake will generate copious free cash flows. This will continue to facilitate shareholder friendly moves like dividends and share buybacks.
While stocks like Chesapeake and EQT will occasionally dip in a knee-jerk reaction to front-month gas prices, intermediate to long-term cash flows are levered to longer-term pricing expectations.
Lastly, a word about politics. We can all-but-guarantee you that, over the next three-plus months, you will be deluged with articles touting stocks to buy based on various election outcomes. You’ll also likely see pieces on whether various outcomes are bullish or bearish for commodities like oil, natural gas, and gold.
Our experience has been that politics — especially US national politics — has far less impact on short-to-intermediate term investment trends than is popularly imagined. Analysts write about politics a great deal for the simple reason that politics is exciting, perhaps more interesting than an analysis of US gas storage and production trends.
National politics brings out powerful emotions. Yet, emotions and excitement don’t necessarily translate into profitable investments. Quite the opposite in many cases. Investment history is littered with the remains of failed political investment theses. For example, the first two years of President Obama’s first term brought strong outperformance by US coal mining stocks despite all the talk of Obama’s plan to “kill” coal.
And, from Election Day in 2016 through the end of 2017 the Invesco Solar ETF (TAN), one of the groups the so-called “experts” expected to fair poorly under a Trump Administration, soared 42.4%. Meanwhile, traditional energy stocks in the S&P 500 Energy Index rose less than 9% over an equivalent holding period.
