Higher Natural Gas Prices Should Be A Boon For Pengrowth Energy
Disclosure: I am long PGH.
One of the most surprising trends during Q4 2013 has been the sharp increase in natural gas prices. From the early November low of about $3.40 per MCF, natural gas prices have gone up 30% and are now trading between $4.25 to $4.50 per MCF. While these prices are still well below their historic levels, they do mark a massive 80% improvement from year ago levels and a 35% quarter to quarter increase.
One of the companies likely to benefit greatly from this trend in natural gas prices would have to be Pengrowth Energy (PGH). About 45% of Pengrowth Energy's production is currently natural gas. Yet, natural gas contributes only 9% to its operating netbacks. This leaves much room for improvement for the company as even a small increase in natural gas margins can lead to an outsized impact to Pengrowth Energy's profitability.
Why have natural gas prices climbed higher during Q4
While it is always difficult to pinpoint the causes for price swings in commodities, for natural gas there at least seems to be a fundamental reason for the increases. For starters, Q4 is a seasonally strong period for natural gas due to its use in heating. A nationwide cold spell can do wonders for the price of the product, as demand spikes and inventories fall. As reported by the WSJ, this seems to be exactly the case with the current spike in prices, with the colder than normal December sending demand for heating fuels higher. As the end result, the last EIA natural gas inventory report shows US natural gas underground storage 9% below its five-year average and 16% below its year ago levels.
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