By Ben Levisohn
Citigroup’s Robert Morris and team note that the investment bank’s meteorologist expects a “colder-than-normal winter” which would be good news for stocks like Chesapeake Energy(CHK), Southwestern Energy (SWN), Cabot Oil & Gas (COG), Eclipse Resources (ECR),Rice Energy (RICE), and Range Resources (RRC). They explain:
- Daniel Acker/Bloomberg News
Citi’s Meteorologist recently issued his initial…winter weather outlook calling for a ~4% colder-than-normal upcoming winter, although this would be ~1% warmer than last winter. Notably, actual [Heating Degree Days, or HDDs,] last winter ended up being within <1% of Citi’s original winter weather forecast issued at this same time one year ago. However, the National Oceanic and Atmospheric Administration is calling for a warmer-than-normal first half to the winter, including in the greater population-weighted demand Northeast region, counter to Citi’s forecast. Nonetheless, we estimate every 1% deviation from normal during the winter (November-March) equates to ~50 Bcf of incremental natural gas heating demand, all else being equal and apart from relative price-driven variations in coal-to-gas switching. Our current 2016 composite spot natural gas price forecast of $3.00/MMBtu (Citi’s official forecast is the Commodities Team’s $3.00/MMBtu Henry Hub forecast) is based on the assumption of normal weather going forward. But as we outlined in our recent Summer Wrap-Up note, a 4% colder-than-normal winter, all else being equal, would lift our 2016 composite spot forecast to $3.20/MMBtu. Notably, a colder-than-normal winter would likely bolster momentum for the more natural gas-leveraged E&P stocks including Chesapeake Energy, Southwestern Energy, Cabot Oil & Gas, Eclipse Resources, Rice Energy, and Range Resources. But we would also point out that Citi’s outlook for much colder temperatures in the Northeast also carries the risk of negatively impacting Appalachian and Utica producers if well freeze-offs and operational disruptions occur, as has often happened in the past during periods of extreme cold or harsh weather.
Shares of Chesapeake Energy have ticked up 0.2% to $7.59 at 2:10 p.m. today, while Southwestern Energy has declined 0.5% to $13.25, Cabot Oil & Gas has gained 2% to $24.06, Rice Energy has risen 1.9% to $18.00, Eclipse Resources has tumbled 5% to $2.76, and Range Resources has advanced 0.9% to $34.96.
