3 Stocks to Play a Rebound in Natural Gas Prices
Ramped
up natural gas production helped push the commodity's price to its lowest
summer levels since 1998. The U.S. Energy Information Administration (EIA)
projects that gas production will rise 10% in 2019, backing up a 12% increase
in 2018 – its biggest annual percentage output gain in nearly 70 years.
Despite
this bearish backdrop along with EIA data last week showing an unexpected build
in natural gas inventories, the commodity staged an impressive late-week
reversal to close 6% above its intra-week low. The surprise turnaround in
prices may relate to a Reuters weather forecast model that suggests a rise in
demand of 2.35 billion cubic feet (Bcf) to 11.3 Bcf over the next two weeks
from the earlier estimated figures, according to marketrealist.com.
Those
who think that recent trading action indicates that prices have mostly factored
in the unfavorable fundamentals should consider taking a long position in one
of these three large natural gas producing companies that tend to track the
commodity's fortunes. Let's examine each firm in more detail and work through
several bullish trading scenarios.
EQT
Corporation (EQT)
With
a market capitalization of $2.63 billion, EQT Corporation (EQT) operates as a
natural gas production company in the United States. The Pittsburgh,
Pennsylvania-based energy giant held 21.8 trillion cubic feet (Tcfe) of proved
natural gas, natural gas liquids (NGLs), and crude oil reserves as of the end
of 2018. EQT's second quarter (Q2) adjusted earnings came in at 9 cents per
share, above analysts' expectations calling for a loss of 4 cents. Revenue for
the period also topped forecasts and grew 38% from the year-ago quarter.
Furthermore, natural gas sales volume increased to 370.1 billion cubic feet
(Bcfe) from 362.5 Bcfe in the 2018 June quarter. The company's stock issues a
1.13% dividend yield and has tumbled almost 50% year to date (YTD) as of Oct.
7, 2019.
EQT's
share price set a fresh 52-week low on Thursday, Oct. 3, but promptly reversed
the next trading day to print a hammer candlestick and close above the
September swing low. Also, a bullish divergence between price and the relative
strength index (RSI) has formed to suggest waning seller momentum. Trade a
possible double bottom by setting a take-profit order near last month's high at
$13.12 and placing stops underneath Thursday's low at $9.06.
Chesapeake
Energy Corporation (CHK)
Chesapeake
Energy Corporation (CHK) engages in the exploration and production of oil,
natural gas, and NGLs in the United States. At the end of last year, the
company held interests in roughly 13,000 oil and natural gas wells. The $2.58
billion natural gas producer reported a loss of 10 cents per share, which
compares to a profit of 15 cents per share in the prior-year quarter. However,
Chesapeake's revenue surpassed the Street expectation by nearly $500 million to
record year-over-year growth of 48%. Analysts have a 12-month price target on
the stock at $1.95, representing 43% upside from Friday's $1.36 closing price.
As of Oct. 7, 2019, the Oklahoma City-based company's share price trades down
35.24% on the year.
Chesapeake
shares trended consistently lower between April and July, but like EQT, the
stock appears to be forming a possible double bottom. A retracement over the
past two weeks has found support from the August swing low and a five-month
trendline. Buying this week on the back of higher natural gas prices has the
potential to trigger a short covering-fueled rally, given that nearly 25% of
the company's float is held short. Traders who go long should look for a retest
of crucial overhead resistance around $2. Set stop-loss orders beneath either
the Oct. 3 low at $1.28 or under the August bottom at $1.26, depending on
personal risk preference.
Southwestern
Energy Company (SWN)
Texas-based
Southwestern Energy Company (SWN) operates as an independent energy firm that
explores for, develops, and produces natural gas and oil. The 90-year-old
company's estimated proven natural gas, oil, and NGLs reserves amounted to
almost 12 Tcfe as of Dec. 31. 2018. Although the energy player came in just shy
of Wall Street's top- and bottom-line Q2 forecasts, UBS Group upgraded
Southwestern Energy stock from "sell" to "neutral." The
Swiss investment bank estimates the current net asset value for the stock at
$1.90 per share based on NGL pricing, actual costs, and restructuring progress.
Southwestern Energy stock has a $1.02 billion market cap and is down 44.87% YTD
as of Oct. 7, 2019.
Since
jumping 65% from its 2019 YTD low, the company's share price has given back
most of those gains over the past month of trading. Despite the recent fall,
the stock now finds support from a previous downtrend line that extends back to
April/May. Those who take an entry should book profits on a move to $3.25,
where price may encounter stiff resistance from the December 2018 swing low and
falling 200-day simple moving average (SMA). The trade offers an excellent
risk/reward ratio of over 1:7, assuming a stop positioned below support at
$1.70 and an execution at Friday's $1.88 closing price ($1.37 profit per share
vs. 19 cents risk per share).
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