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Northeast gas-driller stocks shine in year of recovery from ugly 2015

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Coal Forecast Surging Export Volumes Aid Coal Production As Gas Competition Tightens


Northeast gas-driller stocks shine in year of recovery from ugly 2015

Riding steadily rising natural gas prices, stocks in Appalachian shale drillers have rebounded from a turbulent 2015 to outperform benchmark indexes throughout 2016.

An equal-weighted basket of the top 10 independent Appalachian gas producers gained 51% year-to-date through the end of trading Dec. 27, according to S&P Capital IQ data. By comparison, stocks in the 61-member S&P Oil & Gas Production Index rose 41%, while the S&P 500 gained 11%.

Two Appalachian shale producers, the coal miner-turned-gas-startup CONSOL Energy Inc. and the gas-startup-turned-mega-producer Rice Energy Inc., have more than doubled the value of their shares in 2016, while the stalwart shale pioneers Southwestern Energy Co. and Chesapeake Energy Corp. gained more than 50% after a disastrous 2015 that saw their market values cut by roughly 75%.

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"We continue to see an underlying shift occurring in the U.S. natural gas production profile," S&P Global Ratings analyst Tom Watters said as he hiked the credit rating agency's benchmark natural gas price assumption to $3/MMBtu on Dec. 14. "Production growth has veered ... to the prolific Marcellus and Utica shale formations in the Northeast. We don't believe Marcellus and Utica have reached their full production potential."

Several years of reduced drilling activity, particularly for oil in Texas with its associated gas, were finally felt in 2016's commodity markets as injection rates into storage slowed during a long, hot summer, Watters said. But any upside is limited. "Producers are quickly able to meet any uptick in demand by, for example, increasing power generation, industrial production, or liquid natural gas exports. This effectively creates a cap on prices," Watters said. "While production of associated gas has slowed as shale oil production has fallen over the past year, any meaningful recovery in oil production will add volumes of gas that are insensitive to changes in gas prices."

Both the Appalachian and S&P driller indexes lost value after peaking in early December.

"Some investors are starting to question the bullish winter natgas trade, as natgas traded down ~3% despite [the U.S. Energy Information Administration] reporting the largest natgas draw (147 Bcf) at this time of the year since 2013," Sanford C. Bernstein & Co. LLC market watcher Alex Leung told his clients on Dec. 12. "I think the recent weakness is just profit taking as natgas is still up 27% in the last 20 days. If anything, the data is further confirmation that natgas markets are tightening up faster than expected, coinciding with natural gas consumption that is beginning to spike in December."

Leung dismissed the notion that natural gas stocks were benefiting from any "Trump bump" to the market following Donald Trump's November electoral victory. "Many investors think that Trump has 'reset' the cycle and early cyclicals are therefore the way to go," Leung said. "I argue that the recent rally has only accelerated the early cycle trade that was already picking up steam before the elections (as industrials are coming out of a recession)."

The 10 independent Marcellus and Utica shale drillers making up the Appalachian index are CONSOL, Rice, Southwestern, Chesapeake, EQT Corp., National Fuel Gas Co., Gulfport Energy Corp., Cabot Oil & Gas Corp., Antero Resources Corp. and Range Resources Corp.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.


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Coal Forecast Surging Export Volumes Aid Coal Production As Gas Competition Tightens

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Higher export volumes aid coal production as gas competition tightens domestically

Jul. 20 2017 — Coal production made gains through June as modest electricity demand to open the summer was offset by stronger exports. Weekly shipments for June came in 24% higher than the same period last year, continuing the improved production results for 2017. However, easing natural gas prices during June provided little headroom for thermal coal prices. The NYMEX CAPP eased by $0.25/ton (0.5%) for the month, while the NYMEX PRB gained $0.24/ton (2.2%).

Natural gas prices traded lower during June than in May, with low electricity demand doing little to clear surplus storage. After opening the month at $3.05/mmBtu, Henry Hub spot prices varied during mid-month from $2.85-3.12/mmBtu, before closing at $3.07/mmBtu. Natural gas remains in a moderate surplus, with June injections trailing modestly below historical averages. Storage levels as of June 23 stood at 2,816 Bcf, 182 Bcf above five-year averages. The surplus restrained natural gas markets during the month, with warmer weather the last week of June kicking off the cooling season and providing a boost to prices.

Coal inventories remain in surplus as well, with April stockpiles growing to just over 166 million tons, 9.3% above normal. The growth in inventory corresponds to estimated displacement of coal from natural gas generation resulting from Henry Hub prices declining by 20 cents per mmBtu. Looking ahead to the summer season, robust cooling demand could add 1.5 million tons per week to production, which would drive coal production to levels not seen since the summer of 2015. For the four weeks ending June 24, coal shipments averaged 15.5 million tons, as demand into the summer season picks up. Production levels continue to improve overall, about 24% higher than the same period last year. Inventories remain above normal, and low electricity demand shoulder season may do little to clear them, tending to keep a lid on prices.

Higher natural gas prices have boosted coal demand for the first half of 2017, especially compared to the dramatic loss of demand that occurred during the first half of 2016. However, surpluses linger in both the coal and natural gas markets going in to summer. If electricity demand remains low, growth in coal production could taper during the peak season.

On the improved demand picture for the year, the CAPP and NAPP coal regions are projected to beat 2016 production levels. A firmer natural gas strip, easing coal retirements during the year, and stronger seaborne metallurgical markets all contribute to the improved outlook. The markets for Illinois Basin and Southern PRB are also projected to rebound by 44 million tons this year on improved price competitiveness.

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