While oil prices this year have traded at lower levels than I expected, natural gas prices have been mostly in line with my expectations. Following the unseasonably cold winter of 2013-14 that depleted natural gas inventories, a mild summer and normal winter – along with record natural gas production in the U.S. – allowed gas inventories to return to normal. There have been no major surprises since that have moved the natural gas market in either direction, so prices have remained depressed this year as I expected.

The longer term picture for natural gas producers is still bullish. The EPA is aggressively phasing out coal, and natural gas still looks to be the biggest beneficiary. The first liquefied natural gas (LNG) export terminal in continental U.S. is set to open within the next six months, with more to follow.

Chemical manufacturers are also taking advantage of low U.S. gas prices. According to the American Chemistry Council (ACC), as of July 238 new chemical manufacturing projects were planned in direct response to low U.S. gas prices. These projects represent $145 billion in capital investment, mostly by foreign companies, and will eventually consume a significant share of the U.S. gas supply. In fact, the ACC also reports that nearly 40% of these projects have been completed or are under construction, and that is beginning to show up in the industrial natural gas demand numbers which have risen every year since 2009:


On the demand side, the U.S. Energy Information Administration recently reported that natural gas production across all major shale regions is projected to decrease this month for the first time ever. Thus, a future with higher demand and potentially lower supply is a pretty good bet, and that should drive natural gas prices higher over the next few years.

In this week’s Energy Strategist I am going review the key metrics for many of the biggest natural gas producers, and examine their outlook in light of current and projected gas prices. Here are some highlights.

ExxonMobil (NYSE: XOM) is the world’s leading publicly traded natural gas producer. Here are the top 10 in terms of gas production during Q2 2015 in descending order, along with some key metrics:

• EV = Enterprise Value in billions as of Sept. 21
• EBITDA = Earnings in billions before interest, tax, depreciation and amortization for the trailing 12 months (TTM)
• Debt/EBITDA = Net debt in billions at the end of Q2 divided by TTM EBITDA
• FCF = Levered free cash flow in billions for the TTM
• Res = Total proved oil and gas reserves in billion barrels of oil equivalent (BOE) at year-end 2014
• Gas = Average natural gas production for the most recent fiscal quarter in billion cubic feet per day
• Oil = Average oil production for the most recent quarter in million cubic feet per day
• CR = Current Ratio (current assets divided by current liabilities)
• Gas = Percentage of reserves that were natural gas at year-end 2014

The world’s six integrated supermajors are also the world’s six largest natural gas producers, but of course they have a lot going on besides natural gas production. The only pure exploration and production (E&P) companies in the top 10 are ConocoPhillips (NYSE: COP) and Chesapeake Energy (NYSE: CHK).

If we remove the integrated companies and just focus on the top 10 pure oil and gas producers with the greatest revenues from natural gas, the list looks like this:

• Gas Rev = Revenue from natural gas for fiscal 2014 in billions
• Gas Res = Year-end 2014 natural gas reserves in trillion cubic feet

However, most of these companies still derive the majority of their revenue from oil production. So if we want to look at the top 10 “purest play” natural gas companies, the list looks quite a bit different. Here, I limited the rankings to companies that obtain more revenues from natural gas sales than from oil sales. Here were the top 10 sorted in descending order by enterprise value:


(Cabot’s EBITDA and related metrics show the effect of a $771 million non-cash impairment charge taken in December to account for the diminished value of non-core oil fields in east Texas. Adding back that sum would yield metrics much more in line with the competition.)

This table comprises the E&Ps that are the largest predominantly gas companies in North America. Besides CONSOL, which is a gas/coal company, these companies are oil and gas companies — with the emphasis on gas. These companies will be the focus of this week’s Energy Strategist.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

An Own Goal for CPLP’s Sponsor   

While our most tanker picks have outperformed this year in a weak equity market and a terrible tape for energy, one has not: Capital Products Partners (NASDAQ: CPLP) has returned -23% since the Feb. 2 recommendation, despite its primary concentration in the resurgent fuel and crude oil tanker markets.

Some of the weakness likely stems from CPLP’s exposure to the ailing container trade: 8 of its 33 vessels are containerships, and this shipping sector continues to feel the pain of  China’s growth slowdown. Traffic on a key Far East-to-Europe route has dropped off noticeably of late amid alongside Chinese exports, even as deliveries of supersized containerships ordered in better times are set to accelerate.

The partnership, while sanguine about the longer-term outlook for containers, has acknowledged the slowdown on the China-to-Europe route and the concurrent slide in containership charter rates this summer. Meanwhile, Reuters reports that the coming “megaships” will exacerbate “massive overcapacity in the market.”

This is not an immediate risk, as all but one of CPLP’s containerships are under charter at least through 2019, and mostly through 2025. But we’ll know more about the extent of the current market weakness once the partnership recharters the one containership coming off its current charter at the end of this month.

Another, less obvious drag on CPLP’s performance may be related to the considerable current legal difficulties of Evangelos Marinakis, the CEO and de-facto owner of Greece-based Capital Maritime & Trading Corp., CPLP’s sponsor and general partner.

Marinakis has been accused of directing a criminal organization, as well as aiding and abetting extortion, bribery and fraud in his capacity as head of Greece’s leading soccer club and former league official, in a case currently under investigation by a Greek judge.

He proclaimed his innocence after being questioned in June, remains free on bail of 200,000 euros and must check in with authorities every 15 days.

The allegations stem from a huge match-fixing scandal. Marinakis and his alleged co-conspirators have been accused of communicating using anonymous burner cell phones, which were nevertheless taped by Greece’s intelligence agency.

The natural temptation is to dismiss this case as so much noise that should have no bearing on the ultimate value of CPLP’s tankers. But it’s clear that the partnership’s value would be impaired without a viable sponsor and that Marinakis is, de-facto, that sponsor. His alleged role as the corrupt godfather of Greek soccer could prove costly under a strengthened leftist government that has pledged to root out corruption and to tackle the abuses of the Greek business oligarchy.

The soccer scandal and the container trade slump are not sufficient, even in combination, for us to recommend selling CPLP shares at the current lows. As we’ve seen elsewhere, CPLP’s 14% yield is hardly protection enough against future declines, but it does indicate the high degree of skepticism already priced in. These risks, however, warrant the downgrade of CPLP to a Hold. There are simpler stories out there and more attractive destinations for new money.           

— Igor Greenwald