There haven’t been many moneymakers in the energy sector this year and two of the few are completely at odds: Those who bet gas prices would fall have been rewarded. So have shareholders of natural-gas producers.
Natural-gas prices ended Wednesday at $1.681 per million British thermal units—up 13% from June’s 25-year low but 23% lower than this time a year ago.
Hedge funds and other speculators in February built up their biggest wager ever on falling prices after mild winter weather across the Northern Hemisphere left behind bloated stockpiles of the heating fuel. They poured into another big short in June as the coronavirus pandemic sapped demand and prices tumbled, according to Commodity Futures Trading Commission data.
The VelocityShares 3x Inverse Natural Gas exchange-traded note, a risky instrument that multiplies bearish bets but can generate big losses on days when gas prices rise, has more than tripled this year.
Low prices have hurt the companies focused on natural-gas production, particularly those that drill in the prolific Appalachian region. But unlike oil producers, whose shares have sunk with crude prices, gas producers’ stocks have risen as the companies figured out how to stay afloat despite dismal prices.
Range Resources Corp. is up 28% year to date, while larger rival EQT Corp. has gained 20%. Cabot Oil & Gas Corp. and Southwestern Energy Co. have added 6.2% and 2.5%, respectively.
Outside of the penny-stock gyrations of a few bankrupt oil producers, that is about it for energy stocks with positive returns so far in 2020. The SPDR S&P Oil & Gas Exploration & Production exchange-traded fund, a widely cited barometer, has lost 44% this year.
“Low natural-gas prices, oversupply, stressed balance sheets of upstream producers and looming consolidation,” said Nick Deluliis, chief executive of Pennsylvania-based CNX Resources Corp., during a virtual petrochemicals conference last week. “This is what success looks like.”
CNX shares are down 1.1% this year, but up 21% over the past 12 months. In an interview, Mr. Deluliis likened what his company and its shale-cracking competitors have done to the natural-gas market to what happened when disruptive technologies and manufacturing processes were applied to software, microchips and even automobile making a century ago— accounts of American ingenuity that resulted in abundance and plummeting prices.
“You’re hearing a different story: the demise of the natural-gas industry, a bust, doom and gloom,” he said. “This is probably the best we could have hoped for when we started.”
A CNX Resources Corp. gas well in Pennsylvania. The company and its shale-cracking competitors have cut costs and dialed back production.
Photo: CNX Resources Corp.Appalachia’s shale-gas producers have outrun falling prices for years with leaps in efficiency. The gas output per rig drilling in the region’s Marcellus and Utica shale fields has risen 10-fold over the past decade, according to U.S. Energy Information Administration data.
Gas prices’ extended time below $2 this year has pushed producers to strip out costs and find ways to squeeze cash from each well. It has also prompted some, including EQT and CNX, to dial back their output and keep their gas in the ground until prices improve.
Analysts believe that time is near. U.S. stockpiles are 16% fuller than normal for this time of year, and some believe the country could run out of places to put gas before heating season starts. That would mean even more shut-in wells and idled rigs, which could hasten the market’s rebalancing.
Given the near cessation of drilling and completing wells during the coronavirus pandemic, the natural decline in productivity of existing wells will rapidly reduce supplies just as demand for gas is rising around the world, said Welles Fitzpatrick, an analyst with SunTrust Robinson Humphrey.
“The debate should be when we re-enter a gas bull market, not if,” he said.
Investors who moved from oil stocks to gas stocks when crude prices crashed in April are sticking with the Appalachian companies in anticipation, Mr. Fitzpatrick said.
In futures markets, speculators have already backed off their bearish bets, flipping this month to a net bullish position, meaning that bets on rising prices outnumber those wagering on a fall. Gas for December delivery traded near $2.70 on Wednesday, while January futures exceeded $2.80.
John Gerdes, managing director at stock research and trading firm MKM Partners LLC, recently raised his forecast for gas prices in 2021 by about 13% to $3 and predicted an equilibrium price of $2.80 in 2022 that would spur the drilling necessary to meet demand. In turn, he boosted his share-price predictions for CNX, Range and Southwestern and upgraded the stocks to “buy.”
Write to Ryan Dezember at ryan.dezember@wsj.com
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