EQT - EQT Corporation: Weather Or Not

2023-03-07 11:33:28 ET

Summary

• This weak, a polar vortex "leak" will affect temperatures as it jet stream moves the cold air East.
• March may end up overall being warmer than was originally expected. The river of storms lining up in the Pacific appear to be warm storms.
• The Haynesville is the swing basin when there is excess natural gas production.
• Rich gas producers are less affected by natural gas prices because the liquids production often "bails the company" out of any dire profit situations that might arise with dry gas producers.
• The current situation pales when compared to the rapid growth of unconventional a few years ago that led to massive overproduction of natural gas.

(Note: This article was in the newsletter on March 6, 2023.)

EQT ( EQT ) and a lot of other common shares have been volatile lately. The reasons are a number of things. But the latest is that there is supposed to be a warmer March than anticipated. Not so fast. First, we have to get through a polar vortex "leak" and they can be unpredictable as Texas found out a few years ago. But if I am reading the weather reports correctly (and this can rapidly change), another "river" of storms is forming over the Pacific Ocean. So once the slow moving cold front heads through, we could well be in for a period of warmer storms.

California often has below average temperatures during such an event because the wetness in and of itself argues for lower temperatures. Now how that will affect things as those storms move East is another matter. But La Ninas often portend some cold weather all the way through the end of May for at least part of the country. The real question will be which part and how much? Or "will it even happen?" For California, La Ninas often have above average precipitation in the March through May period. That alone can lead to below average temperature (especially when you get used to beautiful drought weather).

People often ask me what natural gas companies do in a situation like this. It really depends upon the company.

From the viewpoint of Antero Resources ( AR ) management, the swing basin is the Haynesville at the current time. Those of you who know the producers know that since this particular slide was presented, there has been a steady stream of announcements about lower rig counts from the Haynesville. Whether it will follow the plan above depends upon a lot of things. But activity is declining.

At least part of the reason for this is that the Haynesville is dry gas production and is located close to the Eagle Ford and the Permian (relatively speaking). Both of those basins produce natural gas as a byproduct of oil production. Therefore, supplies in that area "overflow" first. The Marcellus, on the other hand, has production in an area that really could use natural gas. So, the Marcellus is a little less affected by this.

Also "rich gas" producers like Antero Resources are less affected by natural gas price swings because the liquids often "bail them out" during periods of poor natural gas prices.

EQT, on the other hand , was heavily hedged much of the fiscal year. Net prices did improve considerably. But nothing close to what a lot of lesser hedged and unhedged competitors received. The other thing is that EQT was long an "in-basin" seller. So, the production was sold nearby regardless of demand supply issues. The downside of this is that the rapid growth of Marcellus production soon produced a bountiful supply of production locally.

Management (throughout the fiscal year) has begun to tackle the transportation issue and how has transportation to some export capacity as well as transportation out of the basin to better pricing markets. Some of the ability will come when the latest acquisition closes and some more has been contracted for. Management has long known there was a pricing issue. But midstream contracts are long term and so that situation will be a relatively slow transition to more flexible pricing.

As a result of all of this, EQT is very unlikely to make a material operational change based upon the weather forecast at the current time. Now when the acquisitions close; then that would be an ideal time to review things.

However, La Ninas are also known for very warm summers. Warm summers also use a lot of natural gas. There are a lot of gas fired electricity plants out there. Even though the current warm spell and predicted warm weather is building a surplus, the situation does not appear to be anything like it was a few years back when the unconventional business was growing rapidly.

More than a few companies I follow report that the ability of North America to export will grow over the next few years. That should allow the price of natural gas to join the usually far stronger world pricing market. Getting there is usually a challenge. But the long-term outlook is pretty promising.

The other thing is that parts of the natural gas stream like ethane and propane are source materials for plastic used in the green revolution.

As can be seen above, China is rapidly investing in plants that make Propylene from propane. The propane market is slated to grow rapidly. The ethane market has been growing rapidly for as long as I can remember. Plastic demand right now seems limitless.

Natural gas is also the source material preferred for the rapidly growing hydrogen market. For Chart Industries ( GTLS ) which supplies machinery and storage products to the hydrogen market, management views it now as a multi-billion-dollar opportunity. Far from being in a downtrend, natural gas is on a long-term usage uptrend by supplying some very rapidly growing markets with the raw materials needed.

The Future

The weather is highly unlikely to cause much of a storage buildup unless it goes a certain way (either too warm or too cold) for a fairly long period of time. It could happen but I do not like the odds. Most likely another season or change in weather will cause the situation to reverse.

What needs to be avoided was the chronic over production (by a mile) that happened when the unconventional business grew very quickly. What is happening now is likely to be taken care of in the future.

Instead, given the future of natural gas, this is probably a good time to consider an investment in a natural gas company (if you have not already). EQT stock is probably one of the strongest that I follow. Natural gas will always be volatile. But a good company and good management often manage to make a decent profit even with all the volatility.

EQT management has made a fair number of acquisitions and another one is currently pending. So, it may take a few quarters for the one-time charges to no longer cloud the quarterly results. The Rice Brothers who run EQT did well for shareholders with the last company they sold. They appear to be on the path to do well with the current company for shareholders as well.

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