To The Moon

Natural Gas Monday rallied to a 14-year nearest-futures high

$Natural Gas - main 2209(NGmain)$ on Monday closed up 3.68%. Soaring European nat-gas prices provide carry-over support to U.S. nat-gas prices after European nat-gas prices rose more than +13% Monday to a 5-month high. Supply concerns are bullish for European gas prices as the Nord Stream pipeline from Russia to Germany will be shut for three days of maintenance on August 31, fueling concerns that the pipeline won't restart as planned after the work is completed.

The surge in European gas prices will keep foreign demand for U.S. gas supplies firm and keep U.S. nat-gas exports running at full tilt, limiting a build of nat-gas storage ahead of the winter season.

Strong demand for U.S. natural gas exports amid Russia-Ukraine conflict

Nat-gas prices have support as EU countries agreed to cut nat-gas demand from Russia by 15% over the next eight months. Also, Russia recently slashed nat-gas exports to Europe to 20% of capacity, putting upward pressure on European nat-gas prices. Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, Netherlands, Poland, and Latvia and reduced supplies to Germany for not acceding to its demand for gas payments in Russian rubles.

Production unsustainable as supply outlook concerns persist

As a longer-term bullish factor, the ongoing drought in the U.S. West has drained rivers and reservoirs, with Lake Mead recently falling to a record low. That threatens to curb power produced by hydropower dams and will prompt electric utilities in the U.S. West to boost usage of nat-gas to increase electricity to satisfy power demand for air-conditioning this summer. 

Last Thursday's weekly EIA report was bullish for nat-gas prices as it showed U.S. nat gas inventories rose +18 bcf to 2,519 bcf in the week ended Aug 12, below expectations of a +32 bcf increase. Inventories remain tight and are down -10.7% y/y and -12.7% below their 5-year seasonal average.

Are there any energy-related stocks of ETFs worth attention?

1. $United States Natural Gas Fund LP(UNG)$

UNG is probably a suitable pick for investors looking for momentum. UNG has hit a 52-week high and is up 184.9% from its 52-week low price of $11.69/share. 

The Natural Gas Price Index is the futures contract on natural gas as traded on the NYMEX. It charges an expense ratio of 1.11%.

Why the Move? 

European natural gas prices continue to increase and are now 10 times the usual amount for this time of year, Bloomberg data shows. A severe heat wave in Europe has been pushing up demand for electricity recently, thereby raising gas prices.

More Gains Ahead?

It seems like UNG will remain strong, with a positive weighted alpha of 149.44, which gives cues of a further rally.

2. $Equinor ASA(EQNR)$

Equinor ASA is a major international energy company with headquarters in Norway. The company engages in the exploration, production, transportation, refining, and marketing of oil and oil derivatives such as petrochemicals. In addition, Equinor is also highly active in renewable energy solutions as the company is operating and developing multiple wind and solar power projects around the world.

The company produces about 2.08 million barrels of oil daily and accounts for 70% of the oil and gas production in Norway. Equinor was formerly known as Statoil and the Norwegian state is the company's biggest shareholder, accounting for about 67% of ownership.

Undervalued vs Peers

Despite the strong share price performance YTD, Equinor stock still looks very cheap. For reference, Equinor currently trades at a P/E of x5, and EV/sales of below x1 and an EV/EBITDA of unbelievable x1.72. Even more notable is the company's discount versus peers. On an industry comparison Equinor trades at a 26.3% P/E discount and an 84% EV/EBIT discount versus peers.

Moreover, if we compare Equinor to US oil companies, the valuation discount becomes even more apparent as EQNR stock trades at an approximate 50% discount to both $Chevron(CVX)$ and $Exxon Mobil(XOM)$ as calculated by almost all metrics, including P/E, EV/sales and EV/EBIT.

3. $Cheniere(LNG)$

Investors have been very bullish on Cheniere Energy's stock price, which has gained an astonishing 93% on the year.

The Europe energy crisis is hurting consumers but some firms, including Cheniere Energy, are benefiting from the EU’s shortfall of natural gas as it looks for alternatives to Russian supply. One key to supply is liquified natural gas (LNG), which can be transported by ship.

Rising US LNG exports to Europe at higher prices as a result of Russian disruption drove record profits for Cheniere Energy in the second quarter of the year. EPS were 44% higher than analysts had predicted. However, despite the recent strong gains, the 12–month forward P/E ratio of about 11x does not indicate expensive valuations for Cheniere Energy.

Technically, the stock is on a strong bull trend, with price momentum overshooting the 50–day moving average by nearly 20% now. Daily RSI entering overbought territory this week may warrant some caution as profit-taking may occur in the near term. A retracement to the $142-$150 support zone may result in some buyers reappearing on dips. However, going forward, as long as the Russian war keeps gas disruptions at a high level, Cheniere Energy will continue to enjoy windfall profits as European countries are forced to continue importing LNG from the United States.

4. $Southwestern(SWN)$

Southwestern Energy Company is a leading US producer and marketer of natural gas, oil and liquefied natural gases (NGLS) through the development of large fossil fuel deposits in a highly productive area of shale gas basins in the United States. It also deals with the marketing and transportation of these goods.

For the second quarter of 2022, Southwestern Energy’s Adjusted net income grew 185.3% year over year to $368 million, from $129 million in the same quarter of 2021. In other words, the company saw adjusted EPS up 73.7% year over year to $0.33 from $0.19 a year ago. Southwestern Energy outperformed analysts by $0.03 on average.

Revenue came in at $4.14 billion, up more than 294% year over year, beating the average analyst forecast by $2.27 billion. Adjusted EBITDA shot up 174% to $822 million in the second quarter of 2022, from $300 million in the second quarter of 2021.

As a result, Southwestern Energy Company, which benefited from higher oil and natural gas prices while running strong operations, also reported an adjusted EBITDA margin of 20%.