David Einhorn sees natural gas prices being significantly higher in 2017. If he's right, Southwestern Energy is going be a stock you want to own.
Christopher Malcolm (TMFWolfpack) May 21, 2016 at 9:08AM
IMAGE SOURCE: SOUTHWESTERN ENERGY CORPORATE PRESENTATION.
The best cure for a low commodity price is a low commodity price. At least that's how the old saying goes. Natural gas prices have been sick for a very long time, and many investors are beginning to wonder if there will ever be a cure.
Greenlight Capital's David Einhorn believes there is a cure for natural gas prices, and he's willing to bet Greenlight's money on it. Let's have a look at his reasoning, what he bought, and a natural gas producer that should have a very positive share-price response if he's proved correct.
Why Einhorn has gone long natural gas
In Greenlight Capital's just-released Q1 letter to investors, Einhorn revealed that he's placed a macro bet on seeing natural gas prices increase. That Einhorn was somewhat bullish on natural gas wasn't new information for us. He previously discussed his bullish view on natural gas in connection with his underperforming position in shares of Consol Energy (NYSE:CNX).
But now we've learned that Einhorn has made an investment directly tied to natural gas prices. As you probably know, there's a futures market for oil and gas prices, where you can trade the commodities. Einhorn purchased the 2017 and 2018 natural gas calendar strip prices at average prices of $2.71 and $2.84 per million BTUs, respectively. If natural gas prices are above those levels, Einhorn is going to make money on this trade.
In his investor letter, Einhorn explained why he took this macro position. His belief rests on the following points:
Natural gas prices aren't high enough to justify drilling, except in the very best locations.
The industry has responded by dramatically reducing drilling activity.
As existing wells deplete, supplies should fall.
The high cost of liquefying and transporting natural gas limits competition to North American sources.
Excess inventory is only a couple percent in terms of annual production, which has already begun to decline.
Einhorn believes that normal weather combined with the lower production that he expects will lead to a natural gas shortage within a year.
Southwestern Energy -- huge leverage to increasing natural gas prices
SWN DATA BY YCHARTS
After a decade of growth at a breakneck speed Southwestern Energy (NYSE:SWN) won;t grow production in 2016. In fact, production will decline by 25% from the start of the 2016 through the end of the year.
The cure for low natural gas prices is working in a major way on Southwestern Energy. With cash flows crimped by decimated natural gas prices, the company is throttling way back on drilling -- as it should, given that drilling natural gas wells when the commodity price is at $2 is a money-losing proposition.
Going to 15
played everyone for a fool
I thought those days were long gone
BK means $0 for equity
What do they have in common??
Doesnt make sense
Oh well, it's not like we haven't seen this before
Plus Hillary and Trump both said drug prices need to come down
Crazy how he can constantly get away with this
He does it everytime