HFI Research says it is time to load up on AR.
hfir.com
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Here are the words: with my comments in blue.
With the recent price drop, even the most logical person would question the bull thesis. But it is on track and here's why.
With the August Henry Hub contracts expiring on July 29, the natural gas market is in for another day of craziness. The recent drop in the front month natural gas NYMEX contract for HH natural gas (AUG25) has managed to drag down the producers' share prices with it, and we saw an opportunity to load up on our favorite US gas producer, Antero Resources (AR). < AR is one of the four gassers in the EPG Sweet 16 Growth Portfolio (AR, CTRA, EQT, RRC). It is not my favorite gasser because AR does not pay dividends and none of its gas is hedged, which I think was a big mistake when they could have locked in very good gas prices of Q4 2025 and Q1 2026. The flip side of that is if HH Ngas prices to rebound, as I forecast that they will, AR has the most near-term share price upside from where the stock closed today.
For the HFIR Natural Gas Portfolio, Antero is now the largest position with Peyto as the 2nd largest. < Peyto (PEY/TO) is a recent addition to EPG's High Yield Income Portfolio.
Given the allocation into AR today, it's clear that we remain bullish on natural gas, but why?
There have been some recent bearish developments in the natural gas bull thesis:
1. Associated natural gas production is starting to meaningfully outpace crude production growth. Gas-to-oil ratio is ballooning out of control in US shale oil basins.
2. Power burn demand weakness this summer was the result of 1) higher renewable penetration and 2) higher coal market share. Higher natural gas prices have resulted in some displacement from coal, so this is a potential headwind going forward. < I expect EIA's gas storage reports to turn bullish in August and September.
3. Most importantly, natural gas rig counts are starting to climb leading market participants to believe that natural gas producers are going to commit the same grave sin they did in the past: overproduce.
But despite the sell-off we've seen in the prompt month, I see the natural gas bull thesis intact. Here are some high-level bullet points as to why:
The newly announced US/EU trade deal will give a clear demand channel for the incoming LNG export boom. One key concern for the US LNG market was that a global LNG surplus could result in liquification facilities in the US not operating at 100%. But the opposite might be true instead; we might not have enough exports to meet what Europe is agreeing to buy. < Which means that EU LNG prices will have to go higher than LNG prices in Asia. The bids for delivered LNG in the EU and Asia have been much higher leading up to previous winters.
Natural gas production growth is needed to meet the incoming export demand increase. Higher rig counts are needed as producers have reduced DUCs (drilled but uncompleted wells). Haynesville production growth is needed, but excess growth will result in oversupply. We need to watch this carefully.
Power burn demand growth will continue. Higher renewable penetration will not result in an absolute decline in power burn demand into 2030. AI datacenter demand is real and will continue to fuel a big part of the demand assumption.
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The big drop in the price of the AUG25 NYMEX contract is because the greed of the Paper Traders got them way too long on the contract. Since the Paper traders cannot take physical delivery of the gas, unless they want to pay big storage fees, they must close out their long contacts at any price. This is actually a "gift" to the utilities and LNG exporters who still need more gas in storage before the winter of 2025/2026 begins in November.
PS: Antero Resources (AR) will be reporting solid 2nd quarter results on July 30 after the markets close.
Dan Steffens
Energy Prospectus Group |
