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There's not much to love about an ultra-hot U.S. summer - unless you're investing in natural gas companies.
The record-breaking temps (the U.S. is on pace for its hottest year ever) have made the country crank the AC, lifting natural gas prices and stocks.
"Hot weather forecasts and elevated cooling demands continue to provide a boost to the market," Addison Armstrong, director of market research at Tradition Energy, wrote in a research note Tuesday.
At Henry Hub in Louisiana, natural gas has increased almost 70% from $1.85 per million British thermal units (BTUs) back in April to $3.14 this Tuesday, the highest price in seven months.
Natural gas has recovered from the decade-low prices it reached three months ago and is now up 4.3% year-to-date. With a buildup in supply looking less likely than it did earlier this year, prices have room to move higher still. That is a stark reversal from a few months ago when a supply glut was fueling the natural gas market and pushing prices lower.
"We can continue to go higher from $3" as the growth in supply slows, Tom Pawlicki, an energy analyst at brokerage EOXLive in Chicago, told The Wall Street Journal.
Natural Gas Rivals Coal Use
It's not just record temperatures that are behind the fossil fuel's climb.
Ample supplies and low prices enticed many utilities to dump coal for natural gas to power plants in continuous operation.
According to data from the Energy Information Administration, in April, for the first time ever, electricity generated from natural gas was nearly even with coal. Customarily, coal has accounted for just under half of the nation's electricity needs, while natural gas historically supplied just over 20%.
Natural gas supplies are still higher than last year but have slipped week to week.
The number released today (Thursday) revealed natural gas supplies rose 26 billion cubic feet for the week ended June 20. U.S. natural gas inventories now stand at 3.189 trillion cubic feet, about 16% above the five-year average and 18% above last year's level for the same week.
Natural Gas Companies: Earnings Watch
While natural gas companies are optimistic about the upsurge in prices, it's too late for the gains to have a significant impact on second-quarter earnings. The sector is still recovering from first-quarter earnings that suffered while natural gas hit record lows.
Companies got a good start to earnings season Thursday when energy behemoth Exxon Mobil Corp. (NYSE: XOM) reported its highest quarterly profit ever.
Exxon reported a profit of $15.9 billion for the second quarter, or $3.41 per share. That massive number included $7.5 billion from "divestments and tax-related items" without which the global oil giant made $8.4 billion, down 21% from the same quarter a year ago.
Exxon, once synonymous with oil but now the world's largest natural gas producer, saw a 5.6% decline in combined oil and gas production from year-earlier levels. Exxon is buying back some $20 billion of its stock and continues to reward shareholders with its 2.65% yield.
Devon Energy Corp. (NYSE: DVN) will report earnings Aug. 1 before market open. The company is expected to report profit of 84 cents per share. First-quarter 2012 earnings for the Oklahoma City-based company were 97 cents per share. Devon's first-quarter earnings were significantly affected by unusually wide Canadian oil price differentials. Following the end of the quarter, Canadian oil differentials began to normalize. From a value point, Devon looks like a screaming "Buy," trading below intrinsic value. And its cash position allows for major capital expenditure for both U.S. and Canadian operations. Wall Street's one-year price target for DVN is $78.41, a 39% premium to Wednesday closing price of $56.59.
EOG Resources (NYSE: EOG) will report on Aug. 3. Estimates are for 93 cents per share. In mid-July, Barclays PLC (NYSE ADR: BCS) reinstated its overweight rating on EOG and Goldman Sachs Group Inc. (NYSE: GS) has EOG on its conviction buy list. The stock, currently trading at $95.50, has dropped from its year high of just under $120, falling with others in the industry on lower gas prices. The one-year price target for EOG is $121.94, 27% higher than yesterday's close.
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