What: Stocks across the entire energy sector are getting hit hard today as the price outlook for oil and gas continues to look weak for some time. The ones getting hit the hardest, however, are companies that are more closely tied to natural gas. Here's just a small handful of companies that have been hit particularly hard today.
| Company | % Price Change |
| Southwestern Energy Company (SWN 0.20%) | (15.6%) |
| Ultra Petroleum (UPL) | (13.2%) |
| Range Resources (RRC 2.15%) | (10.2%) |
| Energy Transfer Equity (ET 0.51%) | (11.6%) |
| Williams Companies (WMB 0.13%) | (10.8%) |
So What: Part of the reason why natural-gas companies are taking it on the chin particularly hard today is because the price for natural gas dipped below $2 per-thousand cubic feet today. That nice round number tends to be something of an anchor for short-term traders, and going below that $2 mark can trigger lots of trading.
What's interesting about the companies listed here is that the three producers mentioned -- Southwestern Energy, Ultra Petroleum, and Range Resources -- are not only highly levered to natural-gas production for their profits, but they also happen to be some of the lowest-cost producers out there.
| Company | Natural gas production (% of total) | Cash cost breakeven* (per thousand cubic feet of gas) |
| Southwestern Energy | 92.5% | $1.25** |
| Ultra Petroleum | 92.5% | $1.94 |
| Range Resources | 70% | $1.64 |
*Cash cost is total cost minus depreciation and amortization cost.
**Southwestern doesn't include gathering and transportation costs in their cash breakeven calculation.
Source: Company earnings reports.
Compared to many of their peers, these three can still generate a net cash-positive return on gas production, even at less than $2 gas. However, so much of their futures are tied to gas, and investors seem scared seeing prices fall below that psychological level.
Energy Transfer and Williams, on the other hand, are likely getting hit because a large component of their respective midstream businesses are tied to natural-gas production. If gas production were to decline from producers losing their appetites for new wells, then these two companies could see a decent decline in pipeline volumes. This would lower distributable cash from their partnerships, and put their payouts in jeopardy.
At the same time, the two pipeline companies that plan to merge are struggling with other pipeline companies that have relied heavily on external sources of capital to build new projects. Following the recent announcement that Kinder Morgan has cut its dividend, investors in the pipeline space are likely wondering if Energy Transfer or Williams could be the next ones to see similar cuts.
Now What: For producers like Southwestern, Ultra, and Range, today's drop in natural-gas prices isn't really enough of a price change to move the needle, but it does suggest that companies in this space could continue to struggle for some time if these low prices persist. The same could be said for Energy Transfer and Williams if those low prices were to lead to lower volumes in their systems.
While today's prices can look very compelling to investors looking to bargain shop, it's probably best to sit on the sidelines for a while with regard to these companies. Energy Transfer and Williams are probably due for a revision of their dividend policies, and higher-than-average gas-storage volumes suggest that natural-gas prices won't be rebounding anytime soon.
