How a Polar Vortex Uncovered a Premium Energy Play

“As cold temperatures blanket much of the U.S., natural gas prices are heating up” I told you back in early December.

Since then natural gas prices have been sizzling.

Today is a great time to update our thesis on some of the best shale gas producers to buy. Remember, in natural gas seasonality does matter! [Below you’ll find an updated version of a chart from our article “Nat Gas Heats Up the U.S. Northeast” from December 11, 2013.]

A quick look at the nat gas thermometer and you’ll see that prices are warming up (again!)…

Nat Gas Prices, Apr. 2013-Present

According to the U.S. Energy Information Administration nearly 50% of American households use natural gas as their primary heat source.

Over the past months, with furnaces kicking-on across the country, natural gas supply (in storage) has been falling. When you add it all up, inventories are 13% below their 5-year average — and nearly 20% below inventories last year.

Naturally, with supplies heading lower and demand creeping up, prices are on the upswing. November lows around $3.60 quickly turned into December highs at $4.25 — and last week we saw January highs over $5!

Connecting the dots you’ll see that with natural gas, seasonality DOES matter. Furthermore, every day that passes with natural gas sitting above $4 shale gas producers are getting an added bonus to their balance sheet.

And besides the obvious, and immediate, jump in spot prices, natural gas producers are able to utilize this pop in prices to hedge their future production as well. Add it all up and it’s a win/win for shale producers that just a year and a half ago were seeing natural gas prices closer to $2.

Think of it this way. A huge natural gas producer like Range Resources produces over 950 million “cubic feet of gas equivalent” (cfe) per day. At $3.25 natural gas (with a quick conversion from cfe to mmbtu), the company would realize revenue of just over $3.1 million (M) per day. But with natural gas prices closer to $5, Range would realize revenue closer to $5M per day.

This added revenue is a welcome gift.

So yes, seasonality does matter. But, as we discussed in our article “3 Companies Banking on 2 Simple Equations”, that’s not the only fundamental supporting natural gas prices.

In fact, there’s another fundamental factor to keep an eye on. Very lucky timing for New York energy users…

Indeed, the serendipity of America’s shale boom can’t be understated. Over millions of years, oil and natural gas formed in various places under U.S. soil. But today’s massive Marcellus deposit under Pennsylvania soil is a godsend for the Northeast.

Not only is the Marcellus being heralded as the world’s second largest gas field, BUT it’s also mere miles from enormous demand centers, like New York City.

However, due to lack of pipeline infrastructure, natural gas was bottlenecked from getting into Manhattan. That is, until now.

One of the main pipeline projects bringing Marcellus gas to New York City was commissioned by Spectra Energy. The pipeline supplies 800 million cubic feet of natural gas per day – according to a company rep, that’s enough energy to heat two million homes. Recent census data shows some three million total households in NYC – so that’s a lot of added natural gas capacity and ensuing demand.

This according to Businessweek:

Consumers in the Northeast and New England typically pay some of the country’s highest prices for natural gas, especially in the winter, when heating demand spikes. During a cold spell last January, the price of natural gas delivered to New York City hit a record high; it cost more than gas delivered across most of Asia, where prices are often triple what they are in the U.S.

A pipeline that opened on Nov. 1 has effectively doubled the amount of natural gas flowing into Manhattan and steadily pulled down the island’s delivery price. In anticipation of the pipeline opening, traders on Oct. 31 drove down the price of gas delivered to New York.

And New York City won’t be the only location to benefit from Pennsylvania’s swelling production. Take a look at the EIA graphic below to see some of the new and planned pipeline projects to service America’s Northeast… (note the Marcellus formation shaded in light brown.)

Natural Gas Pipeline Expansion Projects in the Marcellus Region
(Source: U.S. EIA)

As more of America’s shale gas finds a market, expect prices to continue to receive support. Whether it’s seasonality due to a polar vortex, residential use, power plant use, manufacturing use, potential exports or other, demand is ramping up for natural gas.

Sticking with our favorite natural gas plays in the Marcellus, you’ll be happy to keep an eye on Cabot Oil & Gas (COG), Range Resources (RRC) and EQT Corp. (EQT) – since December, these three companies are up an average of over 10%.

Keep your boots muddy,

Matt Insley
for The Daily Reckoning

P.S. With such an abundant source of natural gas in the U.S. northeast, this story is far from over. I’ll be giving my Daily Resource Hunter readers regular updates one the best ways to take advantage of it as the story progresses. Make sure you don’t miss out. Sign up for my FREE Daily Resource Hunter email edition, right here.