The collapse in natural-gas prices in recent months has generated a fraction of the attention of the run-up of the first half of 2022. But it could dent 2023 profits industrywide—and dampen inflation by reducing heating and electricity costs this year.
Natural gas traded on Friday at $2.90 per million British thermal units, down 8% on the week and at its lowest level since 2021. Gas has fallen 35% this year, and 70% from an August peak of nearly $10.
So much for the bull case of a year ago that was keyed off rising global demand for U.S. liquefied natural gas and the critical role of gas as a substitute for coal in electricity generation worldwide.
A warm winter in the U.S. and Europe, as well as rising domestic production, are to blame. Temperatures in New York City, for instance, have averaged about 10 degrees above normal in January.
Gas production, meanwhile, is up 5% year over year. J.P. Morgan analyst Arun Jayaram sees the market flipping from an undersupply of 1.5 billion cubic feet a day in 2022 to an oversupply of 2.0 billion in 2023, he wrote on Friday. U.S. production is about 100 billion cubic feet a day.
Gas storage levels could end October, the start of the winter heating season, at record levels, and production cuts may be needed to balance the market, Jayaram wrote.
Supply and demand will probably come into balance over the next 18 months, Matt Portillo, an analyst at Tudor Pickering Holt, told Barron’s. “By the time we get to 2025, we think the market starts to look quite tight,” he said.
The major gas stocks, including
EQT
(ticker: EQT) and
Chesapeake Energy
(CHK), have held up better than the commodity this year. EQT, at about $33, is off 3%, and Chesapeake, at $88, is down 7%.
“While we remain bearish natural gas in the near term, Chesapeake remains our favorite stock among the gas-levered E&Ps, given the strength of its cash-return program,” Jayaram wrote recently. Like others in the industry, Chesapeake has a profit-linked payout that resulted in an outsize dividend of over $3 a share in the fourth quarter. He has an Overweight rating on the stock and a price target of $133.
Jayaram also likes EQT, the top domestic gas producer, but it is more leveraged than Chesapeake and offers a lower dividend, about 2%.
Gas bulls also can get exposure to the commodity through the
United States Natural Gas
exchange-traded fund (UNG), which is down 70% from its August high at about $10 on Friday.
Value investor David Einhorn had a strong 2022 after a largely forgettable decade of weak returns.
His Greenlight Capital hedge fund finished the year up 36.6% net of fees, helped by short positions in a basket of highflying stocks and long positions in coal stocks and Twitter.
Investors who want to ride with Einhorn can buy shares of
Greenlight Capital Re
(GLRE), an offshore reinsurer based in the Cayman Islands that has 60% of its shareholder equity invested with Einhorn, who is the company’s chairman and controlling shareholder.
Greenlight Re shares are up 30% in the past 12 months, at $9.40, in what has been a strong reinsurance sector. But the stock trades at a discount to nearly all of its peers at about 70% of its third-quarter book value of $13.55 a share. Most reinsurers now trade at a premium to book value.
Greenlight Re’s portfolio was up 25.3% in 2022, reflecting lower risk than Einhorn’s hedge fund portfolio. Both have a mix of long positions and shorts (which aren’t disclosed).
When it went public, Greenlight Re fashioned itself as a mini
Berkshire Hathaway
(BRKA), which has long used property and casualty premiums to buy stocks. But Einhorn has been less successful than Berkshire CEO Warren Buffett.
Greenlight Re’s discounted share price reflects its weak performance since going public in 2007, with the stock trading for half the initial-public-offering price. The company is small, with a $350 million market value, and has virtually no analyst coverage.
Known for a deep-value orientation, Einhorn lamented in a client letter that many investors with a “value bent either adapted, retired, or went out of business. Value investing, as an industry, is unlikely to ever fully recover.”
Greenlight Re also is a play on higher reinsurance rates in the property and casualty sector. In a November presentation, the company said that “2022 reinsurance pricing conditions were the best we have seen in over a decade.”
Greenlight Re’s largest holdings reflect Einhorn’s deep-value focus. They include
Brighthouse Financial
(BHF), a life insurer and annuity provider spun out of
MetLife
(MET), trading at a fraction of book value and four times projected 2023 earnings;
Consol Energy
(CEIX), a coal company fetching three times estimated 2023 earnings; and
Kyndryl Holdings
(KD), a depressed tech-services company spun out of
IBM
(IBM) that is valued at just 20% of its annual sales.
Write to Andrew Bary at andrew.bary@barrons.com
Credit: marketwatch.com