Natural Gas Producers Woes Continue

Two natural gas-focused E&P companies are now down approximately 95% over the last five years. Driven by the over-supply from Permian Basin development (focused on oil, where natural gas is merely a byproduct).

5-Year Stock Performance: CHK (Dark Blue) and RRC (Light Blue)

More recently, over the last 3 months, these two stocks have declined approximately 50%.

3-Month Stock Performance: CHK (Dark Blue) and RRC (Light Blue)

Given the declines in commodity prices, the market is now punishing gas-focused E&P companies for capital expenditures, where it once rewarded companies for quickly deploying investor capital.

Attempting to right the ship, CHK announced in its 2nd quarter earnings call a focus on reductions in cash spending, margin improvement versus growth and increased oil production versus primarily naturally gas.

It remains to be seen whether gas-focused E&P stocks can recover, or whether their assets will be refinanced in bankruptcy.

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on August 19, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the August 19, 2019 prices, the markets indicate that in mid-September there is a 68% chance that oil prices will be between $50.50 and $60.50 per barrel. Likewise, there is about a 95% chance that prices will be between $43.50 and $66.50. In mid-December 2019, the +/- 1σ price range is $45.50 to $64.50 per barrel, and the 2σ range is $35.00 to $77.00 per barrel. In other words, there is a 95% probability that the expected price of oil will be between approximately $35 and $77 per barrel and a 97.5% probability it will not be above $77 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.21 per MMBTU on the Henry Hub. Although more affected by seasonal factors than crude oil, in mid-September 2019, the +/- 1σ price range is $1.95 to $2.50 per barrel (68% probability) and the +/- 2σ range is $1.60 to $2.85 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful. If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $77 by mid-December 2019, so I wouldn’t count on it.”

Tags: Oil & Gas Price Outlook August 2019, Gas Price Outlook August 2019, Oil Price Outlook August 2019

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