Nat Gas
Natural Gas (NG) prices in Europe and Asia remain in powerful upward trends. As a result, we would not bet on a significant downward price correction in the US NG futures market, especially with NG in the US trading at a huge discount to NG in other parts of the world. However, despite being long this commodity via the stocks of NG producers, we are hoping for a meaningful short-term correction.
The reason is that we would like a good opportunity to get even more long ahead of what could be an unusually-severe Northern Hemisphere winter.
The price action indicates that a short-term top may have been set earlier this month when the nearest futures contract rose to US$4.20. If so, a correction would be expected to find support between US$3.10 and US$3.40. The upper end of this potential support range is based on a continuous chart. The lower end of the range is determined by equivalent support on a chart of the October-2021 futures contract (currently the contract with the largest open interest).
There was a large decline in PEY’s earnings during the latest quarter. The company earned C$0.40/share during the December-2020 quarter and C$0.23/share during the March-2021 quarter, but earned only C$0.08/share during the latest quarter. The decline in earnings was mostly due to a sizable (C$22M) realised hedging loss.
Almost all large and mid-tier North American NG producers hedge a substantial portion of their production. This generally will smooth earnings over a 12-month period. However, it will lead to large hedging-related gains during any quarter when there is a substantial decline in the spot price and large hedging-related losses during any quarter when there is a substantial rise in the spot price. There was a substantial rise in the spot price during the latest quarter, so PEY along with many other NG producers incurred large hedging-related losses — both realised and unrealised.
Production decreased from 91,000 boepd to 89,000 boepd quarter-over-quarter but is expected to increase to around 100,000 boepd by the end of this year.
Regarding PEY’s balance sheet, the company’s book value (BV) decreased from C$1,700M (C$10.30 per share) at 31st March 2021 to C$1,634M (C$9.84 per share) at 30th June 2021. The decrease was solely due to hedging-related losses.
Overall it was a sub-par financial performance from PEY during the June quarter, but the share prices of commodity producers tend to be driven more by expectations regarding future commodity prices than by the latest quarterly results.