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Must-know: Why frigid temperatures boosted natural gas companies

Ingrid Pan, CFA

Why last week's cold weather should benefit these companies (Part 1 of 2)

Winter weather affects natural gas prices

Natural gas prices are especially affected during the winter, as many households use natural gas for home heating. Warmer weather translates into less natural gas demand and therefore lower prices. Conversely, colder weather translates into more natural gas demand and higher prices. Natural gas prices affect the earnings of major domestic natural gas producers, such as Chesapeake Energy (CHK), Quicksilver Resources (KWK), Range Resources (RRC), and Southwestern Energy (SWN). Also, many of these companies are part of energy ETFs, such as the SPDR Oil & Gas Exploration and Production ETF (XOP).

Heating degree days were higher than normal last week, with cold weather boosting gas demand

For the week ending December 14, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 251 versus the normal figure for corresponding weeks past of 192. Heating degree days (or HDD) measure how much colder than room temperature the weather is, and the greater the HDD figure, the colder it is. This week’s HDD figure was much higher than normal, meaning weather was colder than normal. This implies more natural gas demand and therefore higher natural gas prices.

Natural gas prices rose on the week, finishing at $4.35 per MMBtu (millions of British thermal units) compared to $4.11 per MMBtu the prior week. Note, however, that natural gas prices tend to trade on weather forecasts—ahead of actual weather. Gas prices had rallied strongly in the week prior and beginning of last week, before falling slightly towards the end of the week, as forecasts portended slightly warmer temperatures in the following days.

Theoretically, higher demand translates into higher natural gas prices, which affects the earnings and valuations of natural gas–weighted producers (and vice versa, in that lower demand means lower prices). The below graph displays natural gas prices over time versus the stock prices of CHK and KWK, two producers whose production is currently weighted towards natural gas. Over the past few years, the equity prices of these companies have trended with natural gas prices.

Investors with holdings in natural gas–weighted producers (such as CHK, KWK, and SWN), an ETF containing producers of natural gas such as the SPDR Oil & Gas Exploration and Production ETF (XOP), or a natural gas ETF such as the United States Natural Gas Fund (UNG) may find it prudent to monitor weather as an indicator of natural gas demand and therefore prices.

See which other companies benefited from last week’s cold weather in the next part of this series.

Continue to Part 2

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