Natural-gas prices seemed to rally 10% as the equity markets opened Thursday morning -- or did they? Actually, the increase was due to the expiration of the November contract.
Shorts had pushed that contract down to $2.02/mmBTU at its expiration on Wednesday, but the December contract is now trading as the front month. And that contract's $2.35/mmBTU price Thursday morning was more reflective of the commodity's actual supply-and-demand balance.
Natural-gas pricing is notoriously volatile, so it's often helpful to look not at the commodity itself but at results from its producers instead.
Wednesday saw strong third-quarter production reported from gas producers Range Resources (RRC) and Antero Resources (AR), as well as sequential growth in throughput reported by Antero Midstream (AM), Antero's pipeline MLP.
All three stocks were rallying yesterday, and it seems that rumors of the Appalachian nat-gas industry's demise have been greatly exaggerated.
I wrote a Sept. 29 column about Magnum Hunter Resources (MHR) when the stock was trading at 30 cents per share, but it went straight up to 60 cents and hit a 69-cent intraday high on Oct. 7.
Then management announced hiring PJT Capital and Kirkland & Ellis to explore "strategic alternatives." The stock went into freefall -- hitting a low of 25 cents, but has rallied a bit in recent trading sessions and was recently sitting at (you guessed it) 30 cents.
Obviously, "strategic alternatives" can be a prelude to a bankruptcy filing, and Kirkland & Ellis has done many of those. So, the market was right to be spooked, but Antero's results (and even more importantly, Antero Midstream's) show that the Appalachian natural-gas market is doing just fine.
Pipeline throughput continues apace. And while the rig count (as I mentioned in my column last Friday) shows us that production won't be growing in 2016, it hasn't fallen off of a cliff, either.
So, if a company owned a very well-located Appalachian pipeline asset and needed to monetize that to maintain production, then the current situation would look constructive for such a deal.
That's where Magnum sits now. The company really needs to monetize its 45.53% stake in the Eureka Hunter pipeline to restart its drilling program.
But at the same time, Eureka Hunter would be worth much less if Magnum goes out of business and can't deliver the natural-gas volume -- estimated by sell-side analysts as 30% of Eureka's contracted throughput -- needed to fill Eureka's capacity.
It's almost a chicken-and-the-egg thing. Magnum CEO Gary Evans is playing a game of chicken with his secured creditors, with Morgan Stanley Infrastructure (Eureka's majority owner) and all the vendors and others that Magnum deals with on a daily basis.
Sometimes it feels like Evans and I are the only two people on Earth who are bullish on Magnum Hunter's prospect. Evans always succinctly sums up his bullish outlook for MHR's Utica shale assets by saying "we have the best rock."
I agree, and the results from MHR's Stewart Winland 1300U and Stalder #3UH wells confirm that. Both placed in the top seven of highest-peak rate Utica wells ever drilled.
So, MHR has the best rock -- but with $940 million of debt and another $411 million of preferred shares currently in dividend suspension, it certainly doesn't have the best balance sheet.
Other firms that control Utica top-seven wells represent a who's who of Appalachian drillers -- EQT Corp. (EQT), Range Resources, Rice Energy (RICE) and Antero. Any one of those companies would love to have Magnum's core acreage. In fact, Antero already bought 5,210 acres of Magnum's less-favored land in May.
So, if you're bullish on natural-gas prices and especially on the Utica shale site (as I am), you have two choices:
- Buy a well-capitalized gas specialist like EQT, Range, Rice or Antero and look for a 20% gain on a quick bump up in natural-gas pricing. A look at the stock charts will show that those moves have happened several times in the last 12 months, so this is a good trade.
- Buy Magnum Hunter in the belief that its pipeline and Utica assets will be enough to coax another entity (perhaps one of the four companies above) to help solve MHR's debt issues. In my opinion, a successful resolution there would push MHR shares to the $1-a-share mark.
The bottom line: I think natural-gas bulls have their choice of four plays -- AR, EQT, RICE or RRC -- for a potential 20% pop.
Or, you can make one much-riskier play -- MHR -- for a potential 200% move.
In the meantime, let's hope for a cold winter!
