This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Citigroup Finds a Hitch in the Shale Trade

Stock quotes in this article: AGU, DOW, LYB, CF, EMN, CHK

NEW YORK ( TheStreet) -- Few expected that a shale drilling boom could push natural gas prices to near decade lows at $2 per million BTU's. But even fewer anticipated its quick 50%-plus rise from 2012 lows and investors now need to prepare for an impact on industrials and agricultural stocks, according to a Monday note from Citigroup.

Rising natural gas prices above $3.25 on the heels of a near 20% jump in the commodity's prices in September may provide a dent to the fourth quarter earnings of agricultural and industrials giants like CF Industries (CF), Eastman Chemical (EMN), Dow Chemicals (DOW), LyondellBasell (LYB) and Agrium (AGU), according to Citigroup.

The sudden surge in commodity prices may signal and end to decade low natural gas prices hit in early 2012 on a glut of supply from the explosion of shale drilling -- cutting at the margins of producers who use gas as a key input - and denting fourth quarter earnings by between roughly 5% and 10%, Citigroup calculates.

Current natural prices at $3.35 are roughly 25% above Citigroup's year-end forecast for the commodity and in-line with 2013 estimates, causing analyst P.J. Juvekar to reduce fourth quarter earnings estimates and forecast that the tailwind on operating margins may be closer to an end than some expect.

"A sustained increase in natural gas prices could be a risk to earnings in 4Q, and possibly beyond," writes Juvekar, in a Monday note to clients. "The companies most impacted in our universe are nitrogen fertilizer and commodity chemical companies, in particular CF, EMN, DOW, and LYB," he adds, in a note cutting the fourth quarter EPS estimates of nitrogen producers like CF Industries and Agrium by 11% and by 5% on ethylene producers like Dow Chemical and LyondellBasell.

In spite of the recent commodity price rise, many notable industrials investors continue to preach the positive earnings impact of low gas prices and vast U.S. shale supplies.

Earlier in October, hedge fund giant Jana Partners said it is counting sustained low natural gas prices and the benefits of a shale drilling boom to be a key piece of its $500 million-plus investment in Calgary-based Agrium, and its push for agricultural conglomerate to unlock share value by splitting its retail business from a much larger wholesale business.

Jana Partners calculates that the benefits of low natural gas prices and a breakup of Agrium could unlock a $50 a share upside in the company.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,804.71 -238.19 -1.40%
S&P 500 1,946.16 -26.13 -1.32%
NASDAQ 4,422.0850 -71.3050 -1.59%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs