Well well well… look who didn’t hedge for the price of Natural Gas to fall below the industry breakeven price of $2.80. You guessed it! Nat Gas producers.
Unfortunately for companies like EQT Corp ($EQT), Southwestern Energy Corp ($SWN), Anteroom Resource Corp ($AR), Chesapeake Energy Corp ($CHK), Ovinitiv Inc ($OVV), and others, last year’s high water mark of over $9/mmbtu in Summer and Fall ’22 handicapped forecasting models to the possibility of $2.263/mmbtu in Winter ’23.
In light of this, internal hedging strategies for producers have been too light to cover these price declines. EQT Corp expects to lose $4.6 billion from derivative losses for ’22 and Southwestern Energy Co expects to lose $6.71 billion in the same period.
How could producers have failed to anticipate prices to fall below breakeven production costs? The answer to that question doesn’t matter. What matters is how can we turn a profit from their miscalculation.
Here’s the data:
Nat Gas Breakeven price: $2.80/mmbtu
Nat Gas current price: $2.263/mmbtu
The moving average price of Nat Gas is trending down rapidly, and sits between $3.50/mmbtu and $4.00/mmbtu.
Here’s the market context:
$BOIL (3x leveraged bull ETF w/ Nat Gas futures underlying) was the #4 most actively traded ticker on the market on Feb 17, 2023 with 82 million shares traded as it was down 11.5%.
Nat Gas prices were last this low in Fall ’20, in the depths of the pandemic. At this time, the price was above the moving average and began the acceleration to the high of $10/mmbtu in Fall ’22.
It has taken 6 months for prices to go from $10/mmbtu in Fall ’22 to $2/mmbtu today.
Here’s the play:
I’m placing big bets on energy producers to make moves to bring prices back above breakeven to cover for losses incurred.
If prices rise from $2/mmbtu to $3/mmbtu, $BOIL will go from $5/share to $8/share —> a 60% return on simply prices returning to breakeven production costs.
Why do I think this is a good idea?:
Because producers have to at least make breakeven if they want to stay in the game. They are motivated to survive.
Could I be wrong? Yes. But the risk/reward scenario is clearly in favor of a long position in Nat Gas through derivatives or other means to track this underlying.
> The floor beneath is very close. If the price goes to $0, you’re not that far away right now anyway. This is unlikely.
> If the price goes to $3, back to barely above breakeven and more in line with the historical averages, that’s an easy profit.
I’m not saying you should do it, but I am saying I am doing it 😉
Good luck, wizards!
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