Wall Street Piles on Natural Gas Stock Bearishness

NEW YORK ( TheStreet) -- The Wall Street view of natural gas stocks hasn't been good, and it got even worse on Friday with pile-on bearish natural gas pricing and stock outlooks from Stifel and Argus Research.

Earlier in the week, as natural gas spot market pricing hit its lowest level in eight months, predictions surfaced calling for a natural gas spot price under $2 in 2012. Pricing may not get that bad, but it is getting worse and that will hit the natural gas stocks hard, cutting into earnings and keeping the sector in the equity market doghouse, according to the latest analyst research.

Natural gas stocks, led by last year's 102% gainer Cabot Oil & Gas ( COG), began a slide that has continued throughout the week.

Stifel reduced its natural gas pricing forecast for 2012 to $3.25/$4.00 from $4.50/$5.00.
The Wall Street view of natural gas stocks continues to be a pile-on pessimism outlook in 2012.

Argus Research took a dim view of the outlook for Chesapeake Energy ( CHK), specifically, based on the weak natural gas pricing environment. As TheStreet noted earlier this year, Chesapeake sold off all of its natural gas hedges at the end of 2011, and said it believed nat gas pricing had reached a bottom. Chesapeake left itself exposed to the whims of the spot market, and the direction has been straight down in spot market prices since it removed all of its nat gas hedges.

Argus Research analyst Phil Weiss, who has a sell rating on Chesapeake, lowered his earnings outlook for 2012 to $1.81 from $2.50 a share based on natural gas market pricing. While natural gas pricing has continued to fall this year -- it was a dog in 2011 -- the real red flag in the Argus report was a warning that Chesapeake may have to write-off natural gas assets in its fourth-quarter 2011 report.

"Given that natural gas prices fell about 9% year-over-year in 2011, we also think it is possible that CHK will announce impairment charges against some of its natural gas assets when it reports 4Q11 earnings in February," Argus said.

Stifel wrote that the most at-risk natural gas companies -- since 2012 outlooks for gas companies set their budgets on gas prices of $4/mcf or higher -- are the gas- weighted companies with the least hedging. This list includes Comstock Resources ( CRK), PetroQuest Energy ( PQ), and Chesapeake.

Comstock and Chesapeake, though, are already trading at or near 52-week low levels, implying that the market has already shunned these stocks based on the natural gas outlook. Cabot Oil & Gas, on the other hand, after rising 102% last year, is exposed to great risk for a decline in market valuation. Cabot shares have fallen 16% in the past five trading sessions.

On Friday, Cabot found some support from the market, up 1%, even as the energy sector continued to fall by 1% and Chesapeake shares declined by 2%. The key to the Cabot gas story is that it's drilling in the most economic gas region, the Marcellus shale, which according to some industry estimates can support natural gas prices as low as $2.25 to $2.50.

The negative news flow about natural gas pricing, in fact, led Cabot to release specific pricing information on Thursday and commentary from its CEO taking issue with market price quotes that Cabot thinks are inaccurate.

"I felt compelled to respond to the continued misinformation around our pricing that continues to find its way into discussions." Dan Dinges, Cabot CEO said in a release. "These commodity prices, while not where we want them, still afford our Marcellus project a significant rate of return around 55 to 60 percent before hedges because of their best in class characteristics."

Dinges added, "We have always been known for our discipline and this environment will not change that. We were successful in reducing our debt between 2010 and 2011, even with a robust investment program that created significant growth. We will continue to evaluate the best path forward for 2012, balancing rates of return with growth and cash flow."

Stifel took a broad view of the natural gas pricing weakness impact and the E&P stocks generally, lowering price targets on Cimarex Energy ( XEC), EQT ( symbol), Newfield Exploration ( NFX), and Southwestern Energy ( SWN) -- though all of the revised price targets still remain above current market values for these stocks, and Stifel rates Southwestern and EQT as "deep value" plays among gas stocks.

In general, Stifel said valuation for the group isn't attractive relative to risks related to 2012 guidance, margin compression from inflation, and even in cases where crude oil has been a driver for gains in exploration and production stocks, the lack of sustainability in a crude oil trade buttressed by geopolitical tensions between Iran and the West.

EQT receives 93% of its overall production from natural gas, and reduced its hedging to 42% from 49% of assets as of year-end 2011.

Southwestern receives 100% of its production from natural gas, and reduced its hedging program to 46% from 50% of assets at year-end 2011.

PetroQuest receives 81% of its production from natural gas and reduced its hedging program to 13% from 18% of assets at year-end.

Comstock Resources has no hedging, and Chesapeake reduced its hedging program from 40% to nothing at year-end.

Cimarex Energy receives 56% of its production from natural gas and reduced its hedging from 6% to nothing at year-end.

Among the largest producers of natural gas that significantly lowered hedging like Chesapeake are:

Exco Resources ( EXCO): 98% natural gas production and a hedging reduction from 58% to 40%.

Bill Barrett ( BBG), 92% production from natural gas and a hedging program reduction from 68% to 39%.

Newfield Exploration: 61% natural gas production and a hedging decrease from 72% to 57%.

-- Written by Eric Rosenbaum from New York.

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