Avoid natural gas companies despite bounce in energy sector.

Oil has had a spectacular rebound as news that OPEC+ might be willing to come to some sort of agreement (with Trump’s help?) The price of WTI popped from the $20 level.  I did share that on March 20 I had started to buy the oil stocks again.  In retrospect it seems brilliant but it was just as surely blind luck.wti-crude-oil-prices-10-year-daily-chart-2020-04-05-macrotrends

It may very well be that $20 was more or less the bottom for crude, but not all companies are exclusively sensitive to crude prices.  In reality, many companies have a diversified production profile which includes natural gas – since gas usually accompanies crude out of a well.  Most integrated companies are large suppliers of natural gas as well. From Investopedia:

  • The top 10 natural gas companies produced about 30% of the world’s natural gas in 2016.
  • The United States is the top producing country of natural gas in the world.
  • Russia’s Gazprom is the world’s top publicly-listed natural gas company.
  • Exxon Mobil produced about 9.97 billion cubic feet of natural gas per day in 2018.

There’s been a confluence of bizarre negative influences impacting the industry all at the same time: demand destruction, warm weather, excess supply and on it goes.  Despite the bounce in crude prices, the natural gas outlook is not so rosy, especially in North America.

Some are optimistic that the declines in oil production might be bullish for natural gas prices.  This is from a recent CBC blog:

Much of the natural gas to hit the market in the U.S. is produced from oil wells. Companies pull oil from the ground, but some natural gas comes up with it.
As many oil companies are now cutting back on oil production, there will likely be much less natural gas on the market. That could mean higher prices.

natural gas valve picThis might ring true if not for falling demand for natural gas due to warm weather. The Energy Information Administration published a more-or-less ignored update on the state of natural gas demand in the U.S.

U.S. residential and commercial natural gas consumption from January–March 2020 averaged about 35.6 billion cubic feet per day (Bcf/d), a decrease of 18% (7.8 Bcf/d), from January–March 2019 and was 10% (4.2 Bcf/d) lower than the 10-year (2010–2019) average, according to IHS Markit estimates for 2020 and EIA historical data. This decrease was driven by unseasonably warm weather.

Coronavirus and weather combined seem to be destroying demand for natural gas as businesses shut down and consumers require less energy for heating and cooling.  Although the larger integrated companies are sufficiently diversified that the impact is mitigated, there are companies that are more oriented towards gas.  Here are a few that were screened for their commitment to natural gas in a Globe & Mail article looking for those companies most skewed towards cleaner energy:

Natural Gas Companies Table

U.S. Residential & Commercial Gas ConsumptionCompanies more dependent upon natural gas production seem particularly vulnerable and not likely to benefit from a recovery in oil pricing – even if it proves sustainable.  If anything, an increase in oil production and corresponding increase in gas supply will only make matters worse for those companies heavily committed to gas.


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About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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