The strongest El Nino weather system in almost two decades, combined with the warmest temperatures in four years, will mean a relatively warm winter in the Midwest and on the East Coast, keeping a lid on energy prices and potentially capping stock prices for companies that produce natural gas.
This year's El Nino, which occurs when Pacific Ocean waters are unusually warm, will be the strongest since the winter of 1997-1998, says Matt Rogers, a meteorologist at Commodity Weather Group in Bethesda, Maryland. Temperatures are expected to be the warmest, on average, since the winter of 2011-2012, he said.
While those who like outdoor activities should enjoy the warmer weather, it doesn't bode well for companies that provide natural gas, such as Chesapeake Energy Corp. (CHK) and Cabot Oil & Gas Corp. (COG), which already are facing near-record reserves.
"There's no question the warmer weather is going to effect the energy sector," says Jason Wangler, a managing director at Wunderlich Securities in Houston. "It's another leg down for the space that comes at the worst time possible."
During the summer, companies such as Chesapeake and Cabot do what they do best -- produce natural gas. In early November, when winter usually arrives, they tend to switch from putting product into storage to taking it out.
Without the usual cold weather, however, none is taken out and reserves continue to build, cutting into prices.
"We're close to full, so now we're waiting for winter to arrive," says Robert Morris, managing director of oil and gas exploration and production equity research at Citi Research in New York. "The problem is, we haven't had any winter yet. With these weather forecasts really warm, there's no demand."
Natural gas stockpiles rose to 3.93 trillion cubic feet in the week that ended on Oct. 30, tying a record set in 2012, according to data from the Energy Information Administration.
That's pushed prices below $2, only the third time in 13 years that's happened, says Phil Flynn, a senior market analyst at Price Futures Group in Chicago.
Cabot Oil & Gas, an independent company that explores and develops oil and gas properties in the U.S., says it will reduce its capital expenditures to $850 million as it attempts to improve operating efficiencies. The company also says it plans to reduce rig count at one of its sites by the end of the year.
Growth in 2016 likely will be from 2 percent to 10 percent, depending on whether natural gas prices remain low or begin to rise. Even with low prices, the company said it plans to accelerate production growth in 2017.
Investment banking firm Howard Weil lowered its target for COG stock from $33 to $31.
Chesapeake Energy earlier this month lowered its capital guidance by 14 percent to $3.4 billion, saying lower natural gas and oil prices present "many challenges" for the energy industry. About 70 percent of the company's revenue comes from natural gas.
The company lost $83 million in the third quarter, or 5 cents per diluted share, versus net income of $251 million, or 38 cents a share, in the same quarter a year earlier. Revenue dropped by almost half to $2.89 billion.
Chesapeake's other issue is the company is heavily leveraged, so each 10-cent move in natural gas prices has about a 5 percent effect on the company's bottom line, Morris says. That's about three times the industry average of 1.5 percent, he says.
It's not all bad news for the company, however. Despite the headwinds it faces, Wangler rates CHK stock as a "buy" because it says Chesapeake is better positioned than many of its counterparts to survive the downturn in energy prices. "The main thing is survival," he says. "It's getting through the downturn and emerging with the ability to take advantage of the upturn. Chesapeake has enough assets and cash flow to where they can get to the other side. A lot of the other companies don't have that ability."
Range Resources Corp. (RRC), another company whose bottom line ebbs and flows with natural gas prices, also has some upside potential after it unloaded its Nora assets in Virginia -- about 3,500 operated wells on 460,000 acres -- for $876 million on Nov. 4. That caused stock prices to jump nearly 10 percent the day the sale was announced.
The sale will reduce debt by 24 percent and reduce operating expenses, Range says. Morris said Citi upgraded RRC stock to a "buy" after it recently fell to a 52-week low, and the asset sale will only help the company's bottom line.
Still, it's not just low natural gas prices that are threatening to hurt companies further -- most can weather the storm when one commodity plunges. This year, however, energy prices across the board are low, blocking alternate sources of revenue, Flynn says.
U.S. crude oil, called West Texas Intermediate, in August fell to the lowest price in more than six years and is down 43 percent in the past year. Propane prices have fallen to the lowest in a decade.
That leaves companies, including Chesapeake and Cabot, with no safe haven should forecasters' prognostications come true and the U.S. winter truly is warmer than normal, Flynn says.
"In recent years it wasn't as bad for these companies as it is now," he says. "Even if they're not making money producing natural gas, they could produce oil and other liquids. Now they have lower oil prices and lower liquid prices. There's nowhere to go and nowhere to hide for these companies."
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