Tag Archives: natural

What Happened To Natural Gas ETFs In October?

This year has been bad for commodities, and natural gas is no exception. China-led global economic slowdown, supply glut and stronger dollar ahead of an impending Fed rate hike have been battering the performance of the energy sector. However, October was a balanced month for natural gas as it faced both the odds and advantages. Natural gas kicked off the month with an amazing performance. There were a number of factors that led to the bullish trend in their prices despite oversupply concerns. After hitting its three-year low, natural gas prices began to rise due to short covering and bottom fishing by traders. This was complemented by rebounding optimism in crude oil as many oil producing companies are also engaged in the production of natural gas. Oil price crossed its $50 per barrel mark on October 8 for the first time since July. The rally extended when consensus of a chilly winter across the eastern parts of the U.S. began to build up. Cold weather boosts demand for natural gas, which is used by around 50% of the U.S. households as the main source of heating fuel. November through March is generally considered as a peak season for natural gas when heating demand is at a high. This led natural gas futures for November contract to settle at the highest level of $2.535 per MMBtu (million British thermal units) on October 12 since September 29. However, natural gas prices retreated in the second half of October when forecast of a warmer-than-normal winter in the U.S., partly due to the El Niño phenomenon, became pronounced for the coming weeks. In the last week of the month, MDA Weather Services had predicted that heating degree days (measurement reflecting the demand for energy required to heat a building) will be 178 over the next two weeks in contrast to 199 in the same period last year. The lower heating degree days indicates warmer weather in the lower 48 states of the U.S.. The forecast of a mild weather pushed natural gas prices to its three-year low of $1.948 per MMBtu on October 27, their lowest since April 2012. This intensified concerns of a supply glut as a mild winter means lower demand for natural gas. However, the supply situation didn’t turn to be as bad as expected when the U.S. Energy Information Administration (“EIA”) released its October 29 update on natural gas inventories for the week ended October 23. The EIA report revealed a less-than-expected rise in natural gas inventories in storage, which increased 63 Bcf (billion cubic feet) to 3,877 Bcf compared to the expected rise of 69 Bcf. This led to some respite in the natural gas market as its price surged 11% from the previous day to $2.257 per MMBtu on October 29. However, concerns about a mild winter loomed yet again, beginning to dampen prices at the start of November. ETFs that follow the natural gas futures witnessed the same swings during October. Below we highlight three of them that were strongly influenced by the topsy-turvy movements of the natural gas futures during the month. United States Natural Gas Fund (NYSEARCA: UNG ) UNG tracks the movements of the price of natural gas as delivered at the Henry Hub, Louisiana. The ETF has been able to manage $487 million in its asset base and is actively traded with about 5.6 million shares per day. It charges 60 bps in annual fees and expenses. The product gained 1.3% in the first half of October but retreated 13.3% in the second half of the month. United States 12 Month Natural Gas Fund (NYSEARCA: UNL ) This fund is designed to track, in percentage terms, the movements of natural gas prices. It has garnered nearly $13 million in assets and trades in an average volume of 23,000 shares a day. It charges 75 bps in investor fees and returned 2.3% in the first half of October but lost 8.8% in the latter half of the month. iPath Dow Jones-UBS Natural Gas Subindex Total Return ETN (NYSEARCA: GAZ ) GAZ follows the Dow Jones-UBS Natural Gas Subindex Total Return Index, measuring the returns that are available through an investment in the futures contracts of the Henry Hub Natural Gas futures traded on the NYMEX as well as the rate of interest from an investment in U.S. Treasury Bills. The note is quite overlooked as it has amassed just about $7 million in its asset base while it sees average volume of roughly 27,000 shares a day. It has an expense ratio of 0.75% and returned 4.5% in the October first half but retreated as much as 25% in the latter. Original Post

Clean Energy Fuels Remains A Buy Despite Stock Price Stagnation

Summary Clean Energy Fuels reported good growth in both volumes and margins. Being cleaner and cheaper than gasoline, natural gas usage is increasing in the transportation industry. Capex cycle is coming to a close and the company expects to turn EBITDA positive by the end of the year. Clean Energy Fuels (NASDAQ: CLNE ) has been a buy for me despite the stock price stagnating over the last couple of years at the ~$8-$12 levels. The stock took a big hit when crude oil prices crashed last year, leading to a carnage in energy stocks. However, CLNE has bounced back by more than 100% since it reached its 52-week lows, as the long-term fundamental growth story remains intact. CLNE is not for the impatient investor looking to make a quick buck. The company’s investment thesis is based on developing a market for natural gas vehicles in the USA. This will take a lot of capital investment and change in customer behavior. The US government is also not aggressively pushing its transportation industry to convert to natural gas from gasoline. This is surprising, given the abundance of natural gas in North America. Many countries with much higher natural gas prices (almost 4-5 times more) have mandated that vehicles use gas as it is a much cleaner source of fuel (e.g. India). CLNE has been performing well despite not being profitable and burning cash to roll out natural gas infrastructure in the US. The company is continuously getting traction as more and more big customers like United Parcel (NYSE: UPS ) and others covert their massive fleets to natural gas. The inflection point for CLNE’s stock will be when the business starts to generate operating cash flow. I think that CLNE is well positioned to take advantage of natural gas usage growth and would advise investors to keep holding on to their positions despite the 2 years of stagnation. Natural Gas is both cheaper and cleaner than gasoline Natural gas has an advantage over gasoline both in economic and environmental terms. Natural gas is ~40% cheaper than gasoline and is considerably cleaner than crude oil and its derivatives. Many countries have mandated public vehicles to use CNG (Compressed Natural Gas) in order to curb pollution. As climate change concerns become more pressing, natural gas usage should increase. The rollout of natural gas infrastructure makes the transformation easier for large customers. Some companies such as UPS are already converting to natural gas in order to being seen as environment friendly. Some companies such as Apple (NASDAQ: AAPL ), Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), etc., are sourcing all their power from renewable energy. The pressure is increasing on both the government and large corporates to increase their usage of green products and services. Converting to a cheaper option which is greener is a no-brainer in my view. Clean Energy Fuels is getting more and more traction Clean Energy Fuels reported another quarter of strong growth, with volumes increasing by 27% and good growth seen in all major segments such as trucking and refuse. Though revenues did not increase at the same pace, the reason was a fall in natural gas prices. The main metric of profit per gallon showed an increase both on a yearly and quarterly basis to 28 cents/gallon. More large fleet owners are converting to LNG Large fleet owners are converting more of their trucks to use CNG and LNG. Raven Transport, UPS, Dilon Transport, etc., are all increasing their usage of natural gas. Vehicle and engine manufacturers such as Ford (NYSE: F ) and Cummins (NYSE: CMI ) are also coming out with newer products which use natural gas. Westport (NASDAQ: WPRT ) is developing a spark ignited natural gas engine which should enable more natural gas conversions. A new area that has opened up for CLNE is the railways industry, where locomotive makers are looking to churn out LNG powered locomotives. The rationale for doing the conversion is the same as with the vehicle industry. There are savings in using natural gas as well as environmental benefits. Natural gas is still cheaper than crude oil despite the oil price crash Natural gas prices in North America have become extremely cheap due to the shale gas revolution and the prices should remain subdued for the medium term as well. This gives a huge advantage to natural gas users in the country. A lot of power plants have already converted from coal to natural gas. The transportation industry has taken some time to do the same because it is more fragmented and the conversion is not that convenient. However, the trend towards more gas usage is irreversible. Henry Hub Natural Gas Spot Price data by YCharts Clean Energy Fuels Risks a) Liquidity Risk – Clean Energy Fuels has been burning cash over the last 2-3 years as it continues to develop LNG stations across the length and breadth of the country. The returns on the LNG stations have not been that high as there is not enough volume generation. The number of LNG vehicles is still small, and it will need a critical mass of LNG vehicles before the LNG network can sustainably generate cash. Clean Energy Fuels is well funded for now, but if the increase in the natural gas fleets is less than predicted, then CLNE will face liquidity issues. This is a problem with all small companies in a new market. Stockholders might face huge losses if CLNE is forced to sell its assets or equity at distressed valuations. The company has plans to spend ~$59 million this year, while the cash on hand is $220 million. The capex will come down by ~35% from last year. The liquidity position is comfortable at present, but it cannot afford too many non-profitable years. The management is predicting that it will turn EBITDA positive by the end of the year. Overall, our core business is doing very well with growing volumes and expanding margins in relatively difficult environment. Although there was pressure on EBITDA this quarter, I want to reiterate that we still expect to be adjusted EBITDA positive for the full year. Source – Clean Energy Fuels transcript The immediate risk facing the company are $145 million of convertible notes that become due in August 2016. The company does not generate positive cash flow so it will have to refinance the debt either through more debt or through equity. b) Crude Oil Price Risk – Crude oil prices have rallied by almost 50% since touching new lows in 2015. The increase in crude oil price has been due to the weakening of the dollar, a rally in major commodity prices, and indications of strengthening demand in Europe and China. However, crude oil price can again fall drastically if growth slows down dramatically in China. There is also the risk of a supply spike if a deal is reached with Iran. If crude oil price falls to $20/barrel, then natural gas will not have a big advantage over gasoline. This will mean that major vehicle customers will have less of an incentive to convert their vehicles from gasoline to natural gas. Stock Performance and Valuation Clean Energy Fuels’ stock has rebounded sharply from a low of $3.99, as crude oil prices have increased and the energy sector has shown signs of recovery. The company is cheap with a P/S ratio of ~1.9x and P/B ratio of ~1.8x, with a market capitalization of $800 million. CLNE data by YCharts The company’s valuation has come down based on P/B multiple. CLNE Price to Book Value data by YCharts Summary Clean Energy Fuels’ stock price has not improved much in the last couple of years as investors keep waiting for the company to become profitable. However, the low stock price was to be expected, given that the company needed to make large investments to build natural gas infrastructure. Most of the capital investments have been made and the company is predicting that it will turn EBITDA positive by the end of the year. CLNE is riding a wave of increasing natural gas usage in the transportation industry. The trend is irreversible in my view because natural gas is both cheap and clean. More industries and companies are increasing their usage of natural gas. The recent sharp rebound in CLNE’s stock price shows that investors still believe in the CLNE story. The company performed well in the last quarter, growing both volumes and per gallon margins. I would look to keep adding CLNE on dips. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

The Weakness In The Natural Gas Market Persists

Summary The price of UNG kept coming down last week. The low extraction from storage is related to the warmer-than-normal weather. The recent rally in oil didn’t bring UNG back up. The recent recovery in the oil market didn’t provide any back-wind for The United States Natural Gas ETF, LP (NYSEARCA: UNG ) that kept coming down in the past week. The Energy Information Administration reported another lower-than-anticipated withdrawal from storage. (Data Source: EIA, Google Finance) The chart above presents the normalized prices of natural gas and UNG since the end of November 2014 till date – over this time frame, UNG fell by 38% and natural gas by almost 37%. This modest gap is due to roll decay attributed to the contango in futures markets. For now, the markets are still in contango, which means this gap between UNG and natural gas prices is likely to further widen in the coming months. But this also suggests that the market expects natural gas prices to start picking up again in the coming months. The EIA reported another lower-than-expected extraction from storage of 115 Bcf. In comparison, the extraction last year was 270 Bcf and the 5-year average was 165 Bcf (as a side note: these comparisons are only intended to provide crude base lines – after all, they also entail a lot of noise (as is the case in any weekly comparison), and as such, we should put an asterisk next to these base lines). The ongoing lower-than-expected extraction from storage may have rendered another blow to UNG this week. Most of the shifts in storage this time of the year are related to changes in weather. The relation between the changes in storage compared to the 5-year average and the shifts in temperatures from normal has remained strong this winter – the linear correlation is still at 0.74, which means the R-square is around 54% (this result in based on certain assumptions, including linearity and normality – two assumptions that might not hold up under scrutiny). This result only tends to show that the ongoing warmer-than-normal winter, on a national level, has kept the extraction from storage lower than normal for this extraction season. On top of this, the current storage level is around 24% higher than only 1.2% below the 5-year average. So the lower extraction, along with relatively normal storage levels has been enough to bring down the price of UNG to its current low levels. (Data Source: EIA , National Climate Data Center ) Last week’s deviation from normal temperatures was 6.38. So for next week’s storage report, the extraction from storage is likely to be, yet again, lower than the 5-year average, which was 165 Bcf. The ongoing low withdrawal is likely to bring storage to even slightly higher-than-normal levels in the coming weeks. Over the next couple of weeks, the weather is still projected to be colder than normal in the east and hotter than normal in the west. For February, the recent monthly report of the National Oceanic and Atmospheric Administration predicts above-normal temperatures in many parts of the U.S., except for certain regions such as the Northeast. But the weather forecast still entails uncertainty mainly related to a potential El Nino. But for now, it seems hard to see how UNG will start to pick up again to its high levels unless the weather starts to get much colder than it is now. After all, even the recent recovery in oil prices didn’t bring natural gas up. The recent news from Baker Hughes of the sharp drop in oil rigs has influenced oil inventors to adjust (or speculate on) their expectations about changes to the U.S. oil supply. This news brought oil prices back up in the past week. Oil rigs have declined by 83 rigs last week, and by a total of 276 rigs in the past year. But this rally didn’t seem to have much of an impact on natural gas prices, which only kept coming down. After all, gas rigs slipped by only 5 in the past week to reach 314. The uncertainty in the weather forecast for February could imply high volatility in the natural gas market. If the withdrawal from storage continues to be lower than normal, this could keep the price of UNG down. For more see: ” Has the Weakness in Oil Fueled the Decline of UNG? ” Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.