During the winter months, energy prices typically experience favorable conditions due to increased heating demand in colder weather, which widens the gap between supply and demand. The use of natural gas tends to reach its peak at the beginning of the winter season as households and office buildings turn to heaters.
The Energy Information Administration (EIA) raised U.S. natural gas consumption estimates by 230 MMcf/d to 93.28 Bcf/d for the fourth quarter of 2023 and by 240 MMcf/d to 104.22 Bcf/d for the first quarter of 2024.
Colder U.S. Conditions Drive Energy Prices Higher
Natural gas prices yesterday added to Tuesday’s gains and reported a 4-week high. Gas prices surged Wednesday on forecasts for colder U.S. temperatures, which would drive heating demand for natural gas. Forecaster Maxar Technologies said that a storm next week will bring wintry conditions to the nation’s eastern half and snow in the Midwest from June 8 to June 12.
On the other hand, the U.S. Climate Prediction Center stated that there is a greater than 55% chance the present EI Nino weather pattern will remain strong in the Northern Hemisphere through March, keeping temperatures above average and weighing on gas prices. As per AccuWeather, El Nino will limit snowfall across Canada this season in addition to causing above-normal temperatures across North America.
Last Thursday’s weekly EIA report was bullish for natural gas prices as natural gas inventories for the week ended December 22 declined by 87 Bcf to 3,577 Bcf, a larger draw than expected 79 Bcf decline; however, less than the 5-year average draw of – 123 Bcf.
As of December 22, natural gas inventories were up 12.1% year-over-year and 10% above their 5-year seasonal average, signaling adequate gas supplies.
Record U.S. Oil and Gas Production and Exports
Winter weather can be a significant tailwind for natural gas prices, with colder temperatures more supportive of heating demand, particularly from residential and commercial segments. But with high gas inventories, a price rally may not persist this winter.
U.S. oil and gas production has grown at a much faster pace, offsetting most of the OPEC+ efforts to push up energy prices by coordinated supply cuts.
Earlier, various OPEC+ oil producers announced voluntary production cuts totaling 2.2 million barrels per day (bpd) for the first quarter of 2024. Leading the cuts is OPEC's kingpin and the world’s biggest crude exporter, Saudi Arabia, which extended a voluntary oil output cut of 1 million bpd, priorly intended by the end of December 2023.
The U.S. is currently producing more than 13 million bpd of crude oil and is headed to a continued increase in the short and medium term. According to data from the EIA, U.S. output hit a new monthly record of 13.252 million bpd in September 2023 and kept the pace at 13.248 million bpd in October. As a result, the country’s crude oil exports also surged.
Meanwhile, U.S. LNG exports are breaking records. The U.S. exported more LNG during the first half of 2023 than any other nation, the EIA reported earlier this year. The average LNG exports during this period were 11.6 billion cubic feet per day (Bcf/d), up 4% from the first half of 2022. Also, October 2023 witnessed record LNG shipments, as per EIA data.
2 Natural Gas Stocks Which Could Benefit from Strong Winter Demand
With a $40.35 billion market cap, Cheniere Energy, Inc. (LNG) is an energy infrastructure company that mainly engages in liquified natural gas (LNG) related businesses in the U.S. The company owns and operates the Sabine Pass LNG terminal in Cameron Parish, Louisiana and the Corpus Christi LNG terminal near Corpus Christi, Texas.
In addition, Cheniere Energy owns the Creole Trail pipeline, a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with several interstate pipelines and operates the Corpus Christi pipeline, a 21.5-mile natural gas supply pipeline interconnecting the Corpus Christi LNG terminal with various interstate and intrastate natural gas pipelines.
On November 29, 2023, LNG and Cheniere Energy Partners, LP (CQP) announced that Sabine Pass Liquefaction Stage V, LLC entered a long-term Integrated Production Marketing (IPM) gas supply agreement with ARC Resources U.S. Corp., a subsidiary of ARC Resources Ltd. (ARX), a prominent natural gas producer in Canada.
Under the IPM, ARC Resources agreed to sell 140,000 MMBtu per day of natural gas to SPL Stage 5 for 15 years, commencing with commercial operations of the first train of the Sabine Pass Liquefaction Expansion Project. This deal will allow Cheniere to deliver high quantities of Canadian natural gas to Europe.
“We are pleased to build upon our existing long-term relationship with ARC Resources, and further demonstrate Cheniere’s ability to construct innovative solutions that help meet the needs of customers and counterparties along the LNG value chain while delivering value to our stakeholders,” said Jack Fusco, Cheniere’s President and CEO.
On November 2, LNG’s subsidiary, Cheniere Marketing, LLC, entered a long-term liquified natural gas sale and purchase agreement (SPA) with Foran Energy Group Co. Ltd, a leading natural gas company based in China.
Under the SPA, Foran will purchase nearly 0.9 mtpa of LNG for 20 years from Cheniere Marketing on a free-on-board basis for a purchase price indexed to the Henry Hub price, plus a fixed liquefaction fee. Deliveries will commence upon the start of commercial operations of the second train of the SPL Expansion Project in Louisiana.
Also, on October 30, Cheniere’s Board of Directors declared a quarterly cash dividend of $0.435 ($1.74 annualized) per common share, up nearly 10% from the previous quarter, paid on November 17, 2023, to shareholders of record as of the close of business on November 9, 2023. The dividend increase reflects the company’s commitment to return enhanced value to its shareholders.
LNG’s trailing-12-month gross profit margin of 86.74% is 83.3% higher than the 47.32% industry average. Likewise, its trailing-12-month EBITDA margin and net income margin of 85.84% and 50.83% are considerably higher than the industry averages of 34.76% and 13.93%, respectively.
Furthermore, the stock’s trailing-12-month ROTC and ROTA of 41.15% and 29.82% favorably compared to the respective industry averages of 9.30% and 7.49%.
In the third quarter that ended September 30, 2023, LNG reported total revenues of $4.16 billion, while its LNG revenues came in at $3.97 billion. Its income from operations was $2.76 billion, compared to a loss from operations of $3.02 billion in the previous year’s quarter.
Also, the company’s net income attributable to common stockholders came in at $1.70 billion, or $7.03 per share, compared to a net loss attributable to common stockholders of $2.39 billion, or $9.54 per share in the prior year’s period, respectively.
During the quarter, the company generated a distributable cash flow of approximately 1.2 billion. As of September 30, 2023, Cheniere’s cash and cash equivalents stood at $3.86 billion, compared to $1.35 billion as of December 31, 2022.
For the full year 2023, the management expects consolidated adjusted EBITDA to be between $8.30 and $8.80 billion. The company’s distributable cash flow is projected to be in the range of $5.80-$6.30 billion.
CEO Jack Fusco commented, “Persistent volatility in commodity markets continues to reinforce the value of our commercial offering and the stability and visibility of our cash flows, and we are confident in achieving full year 2023 results at the high end of our guidance ranges.
“Looking ahead to 2024, construction on Corpus Christi Stage 3 continues to progress ahead of plan, and I am optimistic first LNG production from Train 1 will occur by the end of 2024,” Fusco added.
Analysts expect LNG’s EPS for the fiscal year (ended December 2023) to increase 519.5% year-over-year to $34.94. Further, the company’s EPS is expected to grow 23.3% per annum over the next five years. Moreover, Cheniere topped the consensus EPS estimates in all four trailing quarters, which is impressive.
Shares of LNG have surged more than 10% over the past six months and approximately 20% over the past year.
Another stock, Pioneer Natural Resources Company (PXD), could benefit from solid natural gas demand during the winter season. PXD operates as an independent oil and gas exploration and production company in the U.S. It explores for, develops, and produces oil, natural gas liquids (NGLs), and gas. The company has operations in the Midland Basin in West Texas.
During the third quarter of 2023, Pioneer’s continued operational excellence in the Midland Basin allowed the company to place 95 horizontal wells on production. More than 100 wells with lateral lengths of 15,000 feet or greater were placed for production during the first three quarters of last year.
In total, the company has more than 1,000 future locations with 15,000-foot lateral lengths in its drilling inventory.
On November 2, PXD’s Board of Directors declared a quarterly base-plus-variable cash dividend of $3.20 per common share, comprising a $1.25 base dividend and a $1.95 variable dividend. This represents a total annualized dividend yield of nearly 5.4%. The dividend was paid on December 22, 2023, to stockholders of record at the close of business on November 30, 2023.
PXD’s trailing-12-month gross profit margin of 52.23% is 10.4% higher than the 47.32% industry average. Moreover, its trailing-12-month EBITDA margin and net income margin of 48.07% and 26.22% compared to the industry averages of 34.76% and 13.93%, respectively.
Additionally, PXD’s trailing-12-month ROCE, ROTC, and ROTA of 22.32%, 14.57%, and 14.04% are higher than the respective industry averages of 19.99%, 9.30%, and 7.49%. The stock’s trailing-12-month levered FCF margin of 11.96% is 104.1% higher than the 5.86% industry average.
For the third quarter that ended September 30, 2023, PXD’s total production averaged 721 thousand barrels of oil equivalent per day (MBOEPD), near the top end of quarterly guidance. The company’s revenues and other income from the oil and gas segment came in at $3.46 billion. Cash flow from operating activities during the quarter was $2.10 billion, leading to a solid free cash flow of $1.20 billion.
However, the company’s net income attributable to common shareholders was $1.30 billion and $5.41 per share, down 34.4% and 31.8% from the prior year’s quarter, respectively.
As per the updated full-year 2023 guidance, Pioneer increased the midpoints of full-year 2023 oil and total production guidance with ranges of 370-373 MBOPD and 708-713 MBOEPD, respectively. But it decreased drilling, completions, facilities and water infrastructure capital guidance to $4.375-$4.475 billion.
Also, the company lowered full-year 2023 capital guidance for exploration, environmental and other capital to $150 million.
Street expects PXD’s revenue and EPS to decline 19.8% and 30.5% year-over-year to $19.50 billion and $21.25, respectively. But for the fiscal year 2024, the company’s revenue and EPS are expected to grow 14.8% and 8.8% from the prior year to $22.38 billion and $23.12, respectively.
PXD’s stock has gained nearly 12% over the past six months and more than 10% over the past year.
Bottom Line
Colder temperatures prompt households and office buildings to rely more heavily on natural gas as a heating fuel. As a result, natural gas prices witness a surge.
However, with natural gas inventors still above the five-year average, the prices may not witness a sustained rally this winter.
Despite relatively weaker prices, oil and natural gas production will continue to climb, creating ample growth opportunities for energy infrastructure companies. Amid this backdrop, investors could consider adding fundamentally sound energy stock LNG to their portfolio for potential gains.
However, given its mixed last reported financials and bleak near-term outlook, it could be wise to wait for a better entry point in PXD.
