Deep value investing. That strategy has driven my new investment vehicle, Excelsior Capital Partners, and it certainly takes one to some interesting corners of the investing world. I am now knee-deep in U.S.natural gas plays, and have removed the call options protection from my Chesapeake Energy (CHK) long stock position. I also own Antero Resources (AR) , and Antero Midstream (AM) , although those positions are still fully protected with short call options.
Most observers focus on one line item in Baker Hughes' weekly "Rig Count" report -- U.S. oil rigs -- but the data on natural gas rigs is even more telling. As of last Friday, only 129 gas rigs were working in the U.S., down about a third from the 194 rigs running in the same week in 2018. According to the U.S. Energy Information Administration, U.S. production of dry natural gas reached a record level of 2.94 trillion cubic feet in August, the most recent monthly data available, but as I so often write in my Real Money columns, the second derivative is the most important factor in investing. The U.S. is producing both oil and natural gas at record levels, but rig counts for both have been declining steadily through 2019. Something's gotta give. Marginal supply will decline as we enter 2020.
So, there's deep value in energy names. I have been following the developments at gas players like Chesapeake, whose management's decision to include "going concern" language in its most recent quarterly 10-Q ignited the stock's sell-off, and Gulfport Energy (GPOR) , which this week implemented draconian workforce reductions and suspended its share repurchase program -- although GPOR management noted that it is still buying back the company's bonds.
Desperate times call for desperate measures, and as natural gas pricing has been in the throes of depression in the vast majority of trading sessions since November 2014, I want to see action from management before I invest. Corporate actions are usually investable, and certainly that is the case in these natural gas plays. So, I will stick with them, even if it is not always pretty. They are short-term, mean-reversion trades, not long-term core portfolio buy-and-holds.
The pricing for natural gas itself -- you can find a quote for the front-month contract by entering NG.1 in your quote service --will remain volatile. Yes, the natural gas futures contract is known as "the widowmaker" among energy traders for a reason. The EIA releases inventory data each Thursday, and this week's drawdown in storage was larger than traders had anticipated, leading to a small gain -- the December contract price rose $0.015 to $2.58/mmcf -- for natural gas futures contracts in Thursday's trading.
Of course I am not invested in these stocks, nor enjoying the relatively large premia in the options contracts I am selling against them, for small gains. The implied volatility in those options contracts are among the highest in the market (especially for CHK), so the market is telling all of us that there is more drama to come. Short squeezes can be just a dramatic as long-holders' share sell-offs, though, and I am looking forward to a quick jump in natural gas stocks as the calendar turns to winter here in the Northeast.
