I've been talking almost exclusively about oil in the past dozen columns -- but what about natural gas? Many readers have inquired about my thoughts on the long-term trajectory of nat gas and whether they mirror my thoughts on oil. Is there value to be found in "survivor"natural gas stocks, like Devon Energy (DVN) or EQT Corp. (EQT), as I maintain there is value in the "survivor" oil stocks?
In short, the scenario for natural gas remains bleak.
The long-term market for natural gas shares similarities to oil: There is a known glut in both that needs to clear -- ither through a decline in production, an overwhelming (and unexpected) increase in demand, or both. U.S. natural gas prices labor under the added burden that they are not in the least affected by global pricing --where possible shortages from Middle East suppliers can mean a lot for crude prices, they are almost meaningless for the local U.S. natural gas markets.
Much like in oil, we've been waiting for the "time bombs" of major restructurings and outright bankruptcies to emerge in the natural gas space and whittle away some of the production -- and I have been equally astounded at the resilience of gas producers to avoid the ultimate ax. Insanely leveraged Chesapeake Energy (CHK), for example, has been a bellwether stock that I've been following to signal to me the beginnings of that capitulation. Instead, it continues to find ways to stay alive -- selling assets, restructuring debt, lowering costs -- and has recently caught the shorts out and seen it's shares actually rally from $1.50 to briefly trade over $5. Southwestern Energy (SWN) is another whose plunge of its bonds into junk territory -- courtesy of Moody's -- while it sat at the low end of its 52-week range was met, surprisingly, with a stock rally.
But the production trajectories of oil and natural gas are different. While the start of a decline has been incredibly slow, we are definitely seeing one in oil production, including indications that the Bakken fields have actually reached production peak.
That's certainly not true with natural gas. Even Wednesday's revisions from the Energy Information Administration (EIA) show a huge, 2.5 billion cubic foot per day, increase to previous shale gas forecasts for March. Producers like Southwestern have guided that they will not drill another new shale well for 2016. But choking, artificial lifting and other efficiency techniques will still keep production targets increasing throughout the year. That, combined with what has been a very mild winter, does not point to a likely rally of natural gas significantly above $2/mcf any time soon.
And so I continue to concentrate on the survivors that I think are most likely to deliver a profit sooner -- in oil. Even now, we've seen the market begin to discriminate between those oil companies that are most likely to make it into 2017 and those that are not.
In natural gas, we haven't even got to that stage yet -- everyone looks to be almost equally at risk until some players, whether smaller or larger, are forced to bow out of the game.