Each week, the U.S. Energy Information Administration releases a report with the most updated natural gas information.
The most recent report indicates that demand for natural gas is rising given cold weather movements in the U.S. Additionally, it reveals that existing natural gas inventories are lower than originally anticipated. This information, coupled with the front month contract price for natural gas via Henry Hub through last Friday—up 4.7% since the prior week—is great news for EQT Corporation (NYSE:EQT), Range Resources (NYSE:RRC), and Chesapeake Energy (NYSE:CHK).
Benefits and risks of seasonal price shifts
For upstream producers, large natural gas price movements should lead to investor concern. A key reason is because volatile prices can translate into volatile revenue.
However, when prices rise, investors win. Currently, the producers are positioned to reap profits from higher margins. But short-term indicators do not tell the whole story. So while EQT, Range, and Chesapeake may record a pop in revenue for this quarter, investors must dive beneath the surface to see long-term potential.
As seen by the below image, natural gas prices are relatively low compared to recent history.
So, increases in natural prices will add to bottom lines.
Long-term growth potential
Each of the aforementioned companies is strategically positioned in at least one of the nation's largest shale gas plays, among other production regions. And given that the EIA's 2013 reference case expects shale gas production to grow 113% through 2040, the long-term picture looks bright.
Specifically, though, EQT operates in the Appalachian basin and continues to generate value for investors. During the third quarter, EQT posted a 177% increase in earnings compared to 2012 while increasing its Marcellus Shale sales volume by 72%. Its revenues are increasing at nearly two times the rate of its expenses, and it continues to innovate. For example, EQT owns and operates midstream and distribution arms, enabling it to reduce costs, streamline processes, and even generate income from competitors who utilize its services.
Like EQT, and with operations in some of the richest shale plays in America, Range expects continued expansion. It forecasts a 20%-25% line of sight production growth for many years to come. Additionally, without quantifying its potential within the Utica Shale, Range's resource potential is 9-13 times its proven reserves. For perspective, even if Range ceased its forward thinking capital expenditure and exploration projects, it would be able to produce 10 times its current production rate. That's a nice hedge of protection, not even considering over 50% of its 2014 projected production is hedged for maximum benefits against major price swings.
Chesapeake is a different animal
Though it operates heavily in the natural gas space, Chesapeake Energy earned less than a third of its revenue from its natural gas, oil, and natural gas liquid operations in the third quarter. So, even though Chesapeake benefited from the 15% realized rise in natural gas and oil prices during the third quarter, its revenues from each resource only increased 3.7% and 1.4% respectively.
The good news is that the streamlined company is repositioned for long-term growth. For instance, Chesapeake continues to strengthen its cash position, eliminate waste and inefficiencies, and expand its presence as the top driller in Ohio in the Utica Shale. For instance, natural gas production in the Utica soared 91% between the second and third quarters of 2013. Plus, Chesapeake is now utilizing the rapidly developing infrastructure of midstream businesses to expedite its process, thereby leading to opportunity for additional production capacity. It reportedly connected 63 wells to sales during the third quarter.
A glance in the future
America's energy industry looks quite optimistic on a macro level, and EQT Corporation, Range Resources, and Chesapeake Energy are all poised to benefit, making them great opportunities for the coming year.
Brendan Marasco has no position in any stocks mentioned. The Motley Fool recommends Range Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.