Cabot Oil & Gas: Natural Gas Price Will Rise After Pandemic Subsides
Despite the apparent decline in demand of oil and gas due to reduced factory activity, the share prices of natural gas stocks are headed for a major boost due to suppression of crude oil prices. Also, the novel Covid-19 (coronavirus) outbreak has diverted the global attention from a high consideration of climate change. This pandemic has created panic from both social and economic fronts, with direct effects seen on life as opposed to factory activity that is the main producer of greenhouse gases (GHGs). In comparison with the pandemic, GHGs are now seen as threats. In this article, I will discuss why I am bullish with natural gas prices, especially Cabot Oil & Gas (NYSE:COG) stock.
Decreased Debt Levels
Cabot's market capitalization reduced from $10 billion in 2019 to $6.85 billion in 2020. This reduction implied that the stock price had also decreased from $27.36 on April 15, 2019, to the current price of $17.35 (as at 3rd April 2020, a decline of 36.59%). During this difficult period of the Covid-19 outbreak, it is expected that the company will require positive cash flow and low debt standing to push through.
In its 2019 end-of year earnings report, the oil and gas mining giant lowered its net-debt to EBITDAX ratio to 0.7 times, 0.3 points below the ratio attained in 2018. Further, its ratio of net debt to capitalization stood at 32.2%, a decline of almost 5% from the 2018 ratio that was 37%. The company entered 2020, with a total debt of $1.2 billion and a positive cash balance of $200 million. The company announced in 2019 that it had secured a revolving line of credit amounting to $3.2 billion scheduled for maturity in 2024. What's more important is that Cabot has no outstanding debt in this facility. This exception leaves the company with a liquidity base of $1.7 billion.
Economic strongholds such as an expected cash flow of up to $300 million and capital base of $575 million were essential aspects that made Cabot to forecast daily natural gas production in 2020 at 2,400 Mmcfe. Insights contained in a report by McKinsey show that, with the global economic slowdown caused by the Covid-19 (coronavirus), production of oil and gas is scheduled for a decrease in 2020.
Dwindling Gas Prospects in the US
Owing to decreased market value of its Marcellus shale gas assets, Chevron Corporation (NYSE:CVX) took a writedown of the same in late 2019 worth $11 billion. The forecast for natural gas production is that it will decline in 2020 and 2021 due to the low profitability of drilling aspects, especially in America. Additionally, the pandemic may likely lead to a global recession that will harden accessibility of capital. Chevron's long-term debt-to-equity ratio in March 2020 was 15%, with Exxon Mobil (NYSE:XOM) at 12.7%.
Further reports indicate that Chevron cut its Permian natural gas and oil production by 20% this March. The company was well set to produce more than 1 million b/d of oil and its equivalent from 2020 onwards after a successful production of 514,000 b/d in 2019 (Q4). In his statement on the impact of the coronavirus on oil and gas production, the CEO, Michael Wirth had the following to say,
“Given the decline in commodity prices, we are taking actions expected to preserve cash, support our balance sheet strength, lower short-term production, and preserve long-term value."
Low Gas Prices
Natural gas futures have decreased from $2.85 (recorded on November 5, 2019) to $1.650 (a decline of 42.11%). Henry Hub's gas price analysis indicated that the commodity traded at $2.24 MMBtu on February 2020. This trade shows that the gas prices are in a record annual low. Additionally, the write-downs at the Marcellus shale on both Chevron and EQT were recorded before the coronavirus pandemic had stalled major global economies including the US.
Predictions from Goldman analysts indicate that the summer-on-summer production would decline to 2.4 Bcf/d against an increase in demand amounting to 5 Bcf/d. Toby Rice, EQT Corp.'s CEO believed that at a price of $2.50 of natural gas, the company would witness little development. With this price showing no sustainability, there is a need for gas companies to consider high forward looking gas prices.
By the winter of 2020/21 season, Goldman Sachs bank is of the opinion that gas prices will hit $3.50 MMBtu. By the summer of 2021, natural gas prices may decrease to $3.25 MMBtu. According to Merrill Lynch, the investment division of the Bank of America, the forward-looking price of natural gas futures may hit $2.45/MMBtu by 2021. One common factor with these two forward-looking prices is that natural gas prices are bound to rally after the impact of the corona-virus on the global economy subsides.
An evaluation of these two reports by (Goldman Sachs and Bank of America) shows that the gas prices may rise to a record high of $4.00 MMBtu by 2021. Exxon Mobil admitted that it would significantly lower its 2020 expenditure due to the Covid-19 outbreak. The company sees that the pandemic has triggered a global recession that has in turn lowered the demand of oil. As it stands, EQT will work to attain an upgrade by Moody's while the low production of natural gas in America will be a major catalyst to propel the futures above 200%.
Low oil Prices
A reduction in oil production will consequently lead to a decrease in the oversupply of gas since natural gas is a by-product of oil. Saudi Arabia shocked investors with its decision to lower oil prices in the mid-month of March 2020. By 11th March 2020, the price of West Texas Crude Oil had declined by 25% to trade at $31.13 a barrel. In an article by CNBC, West Texas Intermediate Crude oil added $3.02 per barrel or 11.93% to trade at $28.34 (on 3rd April 2020).
This increase was after Vladimir Putin, the Russian President called for global action towards the reduction of oil production to $10 million barrels per day. On its part, Brent Crude oil increased by 13.9% to settle at the price of $34.11 per barrel. For WTI, the increase in price to $28.34 is actually a decline of $2.79 or 8.96%. In essence, the price of oil may hit record lows in a few months.
Also, analysts believe that the reduction of oil prices is a contingent measure to help countries and especially the manufacturing world to absorb the effects of the Covid-19. This decrease is, however, injuring the Middle Eastern economies that depend on oil production as well as exports. Price wars between Russia and the Middle East representative - Saudi Arabia has caused oil price to trade below $30 since March 6, 2020. Since natural gas is tied to oil production, an increase in oil price after this price war ends will consequently push the gas prices up as well.
Further reports indicate that even an agreement between OPEC and non-OPEC countries to deepen cuts in oil production would still not raise oil prices to significant levels. At the moment, the demand for oil is at record lows as consumers from India, major European countries, Africa and even the United States remain in an economic lock-down. This unprecedented event has ensured that more than 3 billion people are significantly inactive as far as oil demand and manufacturing activity are concerned.
Bottom Line
Prices of natural gas are tied to production and demand of oil. This direct correlation means that a decrease in oil price will also cause a decrease in production of gas as it is a by-product of oil. At the moment, oil prices have ranged below the $30 mark since March 6, 2020. Agreement by major oil producers to decrease production so as to increase oil price may at the moment be insufficient to significantly increase oil prices. The low demand for oil also reflects in low demand for gas. We have expressed optimism with COG due to its strong balance sheet, cash reserve, and low debt balance amid the Covid-19 pandemic.