Expect natural gas stocks to continue surging

The global shortage of natural gas is deepening with climate nutters doubling down on renewables

Natural gas prices have been soaring as world natural gas supplies fail to keep up with demand for gas fueled electrical power, home heating and cooling and petrochemical needs. The shortage is an artificial shortage (there is not a shortage of gas, particularly not in North America). Left wing leaders like to blame the price spike on Putin’s invasion of Ukraine and there is no doubt that exacerbated the European situation but the North American problem is “home grown”.

A million cubic feet of natural gas typically produces just over 1 gigajoule of energy and is more or less equivalent on an energy basis to 1/6.1 barrels of oil. The industry will report gas in barrels of oil equivalent (BOE) based on a ratio of 6.1 mcf of gas per barrel of oil. From the point of view of energy demand, where substitution is technically feasible, the BTU equivalence makes sense when discussing the energy shortage.

In Europe, the price of natural gas is often reported in pence per therm (the United Kingdom) or Euro’s per therm (the continent) making comparisons confusing for many investors. One therm is one tenth of a gigajoule, so to convert prices per therm to prices per million cubic feet or per million gigajoules, multiply by ten. The currency conversion changes daily but is easy to do regardless of whether it is Sterling or Euros, and the Canadian/U.S. exchange rate is pretty familiar.

The reference point for North American natural gas prices is Henry Hub in the States and AECO in Canada, but prices differ across many pricing hubs, adding to the confusion for many investors.

Today, Henry Hub is priced at US$8.95 and has shown rapid increases all year.

With the vast natural gas resources in United States, you have to ask why? The answer is stupid energy policies under Joe Biden who labors under the delusion that CO2 causes climate change, an absurd theory easily proven wrong using no more than basic physics and arithmetic. I wrote about that separately.

At US$8.95 gas is now prices at the equivalent of ~US$55 per barrel oil, about half the going price for oil based on West Texas Intermediate (WTI) of US$114. No one is going to switch to oil from gas to generate power in North America any time soon.

Biden’s attack on fossil fuels has seen capital flee the energy industry with little supply response to the deepening shortage. Natural gas production is up a scant 1% over last year with all of that growth in the last month.

Notwithstanding, Biden has promised to expand Liquified Natural Gas (LNG) shipments to Europe to help ease their dire shortage which has seen natural gas prices more than double those in North America.

Any LNG shipped to Europe just exacerbates the shortage of gas in United States and Canada. This shortage is more likely to get worse than ease barring a major recession.

So who really benefits? The answer is low cost Canadian natural gas producers smart enough to avoid so-called “hedging” where they buy puts to protect against a price collapse (a sensible idea) but write calls to help pay for the puts (a stupid practice). The companies with large hedge books have capped the benefit they get from higher prices and are booking losses. Those include ARC Resources ARX.TO and Peyto Exploration and Development PEY.TO. Companies with significant natural gas production who are unhedged or have very limited hedges will really benefit and include Birchcliff (BIR.TO) Tourmaline (TOU.TO) Canadian Natural Resources (CNQ.TO) Spartan Delta (SDE.TO) and NuVista (NVA.TO).

U.K. leaders are shooting themselves in the foot again with their recent decision to impose a 25% “windfall” profit tax on oil & gas. That is unlikely to encourage any increase in supply.

Joe Biden has not let up on his attack on oil & gas. That is unlikely to encourage added supply.

Wise investors profit from stupid government policies. Donate a few dollars to keep Joe Biden as president. It is certain to pay off in your oil & gas names.

I put my money where my mouth is, and own:

96,000 Spartan Delta
60,000 Birchcliff
2,000 Tourmaline

I have taken profits on CNQ.TO and NVA.TO and those sales were premature. I also own 16,000 PEY.TO having switched the majority of what was an 80,000 share position into Spartan Delta. That switch paid off.