'Light At The End Of The Decade' For Natural Gas

In a new report this week, Bernstein analyst Bob Brackett spelled out the firm’s long-term outlook for natural gas stocks. While Brackett believes that natural gas is in for several more years of depressed prices, he also discusses what could be the “light at the end of the decade” for natural gas beyond 2020.

Five-Year Outlook

After putting together Bernstein’s five-year projected natural gas supply/demand model, Brackett describes the firm's 12-month outlook for gas prices as “somewhat constructive.” Brackett sees a slight tightening of the natural gas overhang during the next year, enough to push prices toward the $4/mcf level. However, investors looking for prices significantly higher than that level might have a while to wait.

Supply/Demand Growth

Bernstein is calling for about 19 bcfd of gas demand growth from 2015 to 2020 (4.7 percent compound annual growth rate) and about 15 bcfd of demand growth from 2020 to 2025. The bulk of this demand growth comes from net exports and coal retirement.

From the supply side, Bernstein’s models predict 15 bcfd supply growth over the next five years from Marcellus/Utica and 5 bcfd of growth from East Texas/Louisiana. Brackett notes that Marcellus/Utica pipeline buildouts could also create additional pricing pressure for natural gas if capacity expands beyond the 16 bcfd of new pipeline that Bernstein is predicting by 2018.

How To Play It

For investors looking to directly play natural gas prices via an ETF such as the United States Natural Gas Fund ETF UNG, Bernstein is forecasting a short-term peak for gas prices at around $4/mcf within the next 12 months. Once it peaks, the firm sees the price confined to a range between $3.50 and $4.00/mcf through 2020.

“After that, when marginal full-cycle Haynesville and Barnett are setting the cost, it should move up to $5-6/mcf,” Barnett explained.

Bernstein names Outperform-rated Range Resources Corp. RRC, Southwestern Energy Company SWN, Chesapeake Energy Corporation CHK and Cabot Oil & Gas Corporation COG as top stock picks.