Since the beginning of last month, the price of natural gas has fallen by more than 15%. The weakness in the natural gas market is likely to continue in the coming weeks. These losses are mostly related to the ongoing drop in demand for natural gas and the steady rise in production. Let's explore these two sides of the equation:
The demand is cooling down in the power and residential/commercial sectors, which account for 70% of U.S. natural gas consumption. Utility companies such as American Electric Power (AEP) use natural gas to generate electricity (this commodity accounts for roughly 23% of American Electric Power's fuel mix). The elevated prices of natural gas in the past several months have led these companies to use other sources of energy, such as coal.
Moreover, the seasonal shift in the has also reduced the demand for natural gas for heating purposes in the residential/commercial sectors. So, the demand for natural gas in these sectors is likely to slowly fall in the near term.
The largest U.S. natural gas producers reacted to the news with sharp falls in their stock prices. Since the beginning of July, shares of shares of Anadarko Petroleum (APC) lost 1.3% to $107.94 and Chesapeake Energy (CHK) was down 9.23% to $26.53. The United States Natural Gas ETF (UNG) was off 15% to $21.81.
During the previous months, the production picked up, as prices rallied and reached higher-than-normal levels during the winter. The high prices have steered gas producers such as Chesapeake Energy to ramp up their production. Further, the growing output from shale formations at such projects as Eagle Ford Shale in Texas and Haynesville in Louisiana has also contributed to rising production. Looking forward, U.S. production is expected to further grow, which will slowly bring down prices in the coming years.
In the near term, the prices of natural gas are likely to keep coming down, which will reduce the profit margins of natural gas producers in the following quarters.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Now let's look at TheStreet Ratings' take on some of these stocks.
TheStreet Ratings team rates AMERICAN ELECTRIC POWER CO as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate AMERICAN ELECTRIC POWER CO (AEP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- AEP's revenue growth has slightly outpaced the industry average of 9.9%. Since the same quarter one year prior, revenues rose by 12.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- AMERICAN ELECTRIC POWER CO has improved earnings per share by 15.9% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, AMERICAN ELECTRIC POWER CO increased its bottom line by earning $3.04 versus $2.60 in the prior year. This year, the market expects an improvement in earnings ($3.47 versus $3.04).
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Electric Utilities industry average. The net income increased by 15.4% when compared to the same quarter one year prior, going from $338.00 million to $390.00 million.
- Net operating cash flow has increased to $1,064.00 million or 40.00% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 18.10%.
- You can view the full analysis from the report here: AEP Ratings Report
TheStreet Ratings team rates ANADARKO PETROLEUM CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate ANADARKO PETROLEUM CORP (APC) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 3.8%. Since the same quarter one year prior, revenues rose by 27.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Looking ahead, our view is that this company's fundamentals will not have much impact in either direction, allowing the stock to generally move up or down based on the push and pull of the broad market.
- The gross profit margin for ANADARKO PETROLEUM CORP is currently very high, coming in at 70.76%. Regardless of APC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.17% trails the industry average.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, ANADARKO PETROLEUM CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- Net operating cash flow has declined marginally to $2,462.00 million or 1.59% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
- You can view the full analysis from the report here: APC Ratings Report