After soaring to 14-year highs in 2022, U.S. natural-gas prices have fallen 45% this year. The country’s largest gas producer doesn’t expect a rebound for many months.
(ticker: EQT), a Pittsburgh-based producer whose operations are spread through Pennsylvania, West Virginia, and Ohio, said in a conference call on Thursday that the market may remain oversupplied for the rest of the year. To get it back into balance, some producers will have to slow their activity.
EQT itself is considering slowing production “should natural-gas prices continue to deteriorate,” said CEO Toby Rice on the call, though the company may also grow production by up to 3%.
Chief Financial Officer David Khani said “it’s going to take some time to get through this year to get to that balanced market.” Once enough producers cut back, it should “set the stage for a better 2024.” It’s notable the company doesn’t expect the full rebound to come until 2024, setting up a more muted 2023.
The problem for natural-gas producers is that supply has ramped up quickly, but demand has lagged behind. A warm winter has reduced demand for natural gas for heating. And even as overseas demand from Europe and Asia has increased, the U.S. has limits on how much natural gas it can export. Currently, about 20% of U.S. production is exported, and that number is unlikely to rise much over the next 18 months because there isn’t enough infrastructure to liquefy and ship natural gas.
Natural-gas stocks have held up well despite the drop in the price of the commodity to a recent $2.30 per million British thermal units from highs above $9 last year. EQT stock has fallen just 3% this year.
(CHK) is down 6%. There are two main reasons for the relatively mild reaction in the stocks. Investors are confident that natural-gas demand and prices will swing higher sometime in the next two years as more infrastructure is built to ship gas overseas. In fact, natural-gas futures set to expire next January are trading above $4.
In addition, several of the companies have hedging strategies that allow them to sell gas for more than current market prices. EQT in particular started adding hedges last year to protect itself this year and next. For 2023, 62% of the company’s production is hedged at weighted-average floor prices of $3.37, with 10% of it hedged at weighted-average floors of $4.20 in 2024.
Analysts often cite those hedges as one reason they like EQT stock even as commodity prices decline. The company’s scale should also protect it from some of the price volatility.
“EQT has the benefits that come with being the largest domestic gas producer though the shares trade in-line with, or even at a lower multiple than many smaller natural-gas operators that have fewer options in our opinion,” wrote Truist analyst Neal Dingmann, who rates shares at Buy with a price target of $41. EQT stock now trades around $31, 7.6 times its expected 2023 earnings per share.
Write to Avi Salzman at firstname.lastname@example.org