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Long NG Producers Thesis
Long NG Producers Thesis
2012 NG Review
Industrial Sector Demand for NG stable R&C, Electricity Sectors source of volatility
Price volatility of 2012 caused by Residential /Commercial(R&C) and Electricity Sectors. Price moves match seasonality of the sectors.
The sharp price fall in Q1 caused by 4th warmest winter on record The sharp rise back since May driven by Coal-to-NG switching for summer electricity production
Current NG prices back at Dec 2011 levels. NG producers equity has not recovered. Market has its doubts on NG price recovery.
Winter SellOff
Summer Rally
Warm winter caused sharp NG price fall in Q1 2012 Weak NG heating demand from R&C sector
Contiguous U.S. temperatures for winter (the months of December January February), from 1895 2012. The winter of 2011 2012 was the 4th warmest winter on record, behind 2000, 1999, and 1992.
NG Price recovery started in May as summer electricity cycle started with Coal-to-NG switch due to low NG prices
UPL is the lowest cost pure play NG producer Profitable at even current NG prices
UPL Cash Flow Break Even at $1.30 NG 20% ROE for Q2 2012
Why now
Winter outlook getting clearer. Expected to be colder than last year. NG producers to move with clarity. Inventory build season has peaked and about to end. NG producers lagging the commodity.
Risks
Fracked well faces 80% decline in production in the first year of production
Coal Vs NG competitiveness Any price dip below $3.5 will bring back switching
NG likely to have more normal inventory cycle for 2013 and a stable price of close $4 That implies huge upside for NG producers Trade: Long UPL