2023-12-10 07:59:28 ET
Summary
- EQT's common stock price is currently low, making it a potential buying opportunity.
- Predicted warm winter and high natural gas storage levels are causing investors to sell, but great investors buy during a time like this.
- Natural gas storage levels are actually low when compared to the growing demand levels rather than absolute amounts.
- Investors should sell when natural gas prices are above average or the original investment premise changes.
- The dropping rig count for dry gas producers will continue regardless of a warm winter until natural gas prices begin to rise.
The common stock price of EQT ( EQT ) is sagging again. Since, this is one of the better managements I follow, it is probably time to consider buying the stock. All the great investors talk about buying bargains when the stock is left for dead.
Right now, we have a predicted El Nino warm winter with "record storage levels" so the price of natural gas is now expected to head down "forever". That means a whole lot of investors are selling a stock whose price has already decreased because currently climbing production will never go down. Therefore, an investment disaster is just around the corner.
Storage
But that is the perfect time to buy low.
So many are focused on the natural gas storage without focusing on the growth in demand combined with the lack of growth in storage capacity. The fact is that even if that warm El Nino winter arrives as predicted, the natural gas storage has a long way to go to get to probably what it should be to avoid "crunch times" by various industries.
Eventually that will happen. It may well be worth waiting for that to happen because getting storage to adequate levels rather than relying on "just in time" deliveries will likely save money as supply interruptions decrease. Usually, it takes a major event before anyone changes the status quo. But the graph above shows that major event will likely happen sooner rather than later.
Who Cares About Rig Activity
So far, the market could care less about rig activity because production is still growing.
The market is watching the production and panicking because of the memories of rapid unconventional growth that produced years of natural gas price declines and misery for the dry gas producers.
But that rapid growth has long since become a memory. There is the fact that operational improvements have led to "more production with less rigs" and the accompanying cost savings throughout the industry. But that is not matching that 43% rig decline shown above.
The reason is that most of the supply comes from dry gas producers who are idling those rigs (the Haynesville noted above is a prime example of dry gas production). It would take far more activity from the oil producers to make up for the activity slowdown shown above.
Long Term Demand
The long-term demand is still forecasted to grow.
But right now the market thinks that this rosy picture is years away. That gives producers plenty of time to continue that rising production shown above to over supply the rising demand and cause a price crash that lasts for years.
But a warm winter causes a one-time drop in demand that is really needed to rebuild supplies to historical and probably more realistic levels. Whether that actually happens is another matter. One would think that the buyers would "stock-up" at lower pricing levels. But as an earlier graph demonstrates, that is clearly not the case so far.
Combining Everything
Natural gas production will grow as long as it produces cash flow to complete DUC's (drilled buy not completed wells). Just because the rig count dropped did not mean that every single well out there was completed and producing. Just about every single company presentation I review demonstrates that can take months.
After than comes things like well clean-up and the initial production surge.
But unconventional wells have a very high first year decline rate. So, when that backlog of wells is completely on production, the market is likely to just as strongly respond to a fairly rapid new well production decline. It will not take years as I keep hearing for that to happen. But that does not mean I know exactly when the change will happen.
Buying Bargains
Over the years I have watched many great investors state that they buy bargains and then they do not worry about it. But on the website, there is a lot of worry that a cheap stock will get cheaper while ignoring the upside potential of a cheap stock. That is market timing. It leads to an old admonition I have heard many times that "the stock market is a store where no one is interested in the merchandise until the price is marked up 200%".
That means I have seen many great investors simply have faith in their research and their determination that they bought value. They then simply hold until "sell high" can happen.
A lot of investors on the other hand sell the stock when it goes down or they sell the stock on the way back up while "patting themselves on the back" for breaking even. But Justin Mamus, who wrote " When To Sell " (which is the only book I ever found on selling stocks) states clearly that the time to sell is when the story changes for the worse. Otherwise, you "sell high". Many investors do not have enough faith in their research to execute that strategy. Those investors, therefore, miss out on the big profits.
Instead of "buy low" and "sell high" you get "buy low" and "sell lower" or maybe "buy low" and "sell at breakeven or a small profit". To avoid this, you have to have faith in your research and your research has to be thorough.
Is EQT Cheap
Current management has had to straighten out one very big mess they inherited from the previous management. But the Rice brothers have an excellent management reputation.
The Rice brothers have consistently created value during one of the most challenging times for the natural gas industry. Note that the slide above, for example goes from the Rice Energy IPO (which has to be peak valuation) to the time the company was acquired.
Often times when it comes to IPO's an investor can wait because more than 95% of the time, that IPO will be priced at 50% or less within roughly 18 months of the IPO. You can see that in nearly any finance book including the Justin Mamus book. In fact, a huge majority of IPO's disappear completely, "without a trace" within five years of going public. So, there is every chance that investors could have done better than the public measurement shown above.
Admittedly, the stock price is not down much from the highs. But management has noted what has been done to achieve better pricing for their production.
Many times, Antero Resources ( AR ) has gotten the best pricing for its production simply by getting that production out of the basin to better markets. The result is that Antero Resources receives a premium compared to other Marcellus producers of up to $1 per MCF. That adds a tremendous amount of cash flow to the bottom line compared to others in the basin over time. Also note there were times when the premium was small. But in an industry like this where every penny counts, Antero Resources has long had a big advantage.
EQT now has only about a 17% exposure to the basin. When I first began coverage after the Rice brothers took over, that exposure was closer to 100%. The future pricing that the company receives is going to be very different from the pricing in an oversupplied basin. That makes the company far more valuable going forward than it was in the past.
On the basis that the rig count decline will affect the price of natural gas even if we have a warm winter (because the rig count will keep going down until a pricing recovery begins whether the winter is warm or cold), this appears to be a classic "buy low" situation.
Management has made a lot of good acquisitions since they took over. A lot of those were excellent bargains at the time. The cash flow at current levels is good enough that Moody's just raised the company rating to investment grade.
The stock is up considerably since 2020. But the prospects have likewise improved tremendously from the acquisitions. Therefore, I do not expect a regular downcycle that I expect with other natural gas stocks.
Management also increased the dividend. Therefore, a lot of things point to a still bargain price.
Risks
Risks would include an extended natural gas price downturn.
There is the possibility that the acquisitions do not perform as well as intended.
There is always the risk of loss of a key person.
Summary
The outlook for the natural gas industry is probably as pessimistic as it can get. This management has regularly used low commodity prices and pessimistic outlooks to sweep up bargains. This began with the Chevron ( CVX ) acquisition which management bought at pennies on the dollar.
The result is that this company is a cash flow juggernaut. It is nothing close to what the Rice brothers began with. Probably the time to sell is when the growth and acquisitions stop. Although sales can be contemplated any time the price of natural gas heads past $4. As Antero Resource management pointed out in their presentation, that has been the average price since 2020.
To "sell high" you want to sell when natural gas prices are above average. Right now, natural gas prices are cheap enough it's time to consider buying bargains.
For me, I will likely sell when I see the Rice brothers sell the company or otherwise exit.
For further details see:
EQT Corp.: Buy Good Management Low