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Natural-gas prices have tumbled this year because of warm weather and high levels of gas in storage in Europe and elsewhere. U.S. prices are down 45% to $2.46 per million British thermal units.
The drop has impacted stocks of some natural-gas producers, though not nearly as much as the price of the commodity itself. As natural-gas prices stay low, however, the impact could widen and pressure a larger group of companies. Stocks of oil producers that also produce significant amounts of gas are vulnerable to the decline, too. Overall, free cash flow for large-cap producers could fall 33% from 2022 levels, according to Citi analyst Scott Gruber. That could keep some oil companies from being able to boost their dividends and buybacks as much as they did last year.
Gruber thinks that the drop will be a problem for the free cash flow of several companies. Oil producers that derive significant amounts of revenue from natural gas and natural gas liquids include
Coterra Energy
(CTRA),
Ovintiv
(OVV),
EOG Resources
(EOG), and
Devon Energy
(DVN), notes Gruber. Oil makes up 32% of Coterra’s revenue; that number stands at 45% for Ovintiv, 72% for EOG, and 73% for Devon.
Citi expects natural-gas prices, which last year briefly rose above $9 per million BTUs, to average $2.70 this year, and $3 in 2024. European and Asian natural-gas prices are expected to be higher, because those regions have less access to their own supplies and have to import more. In Europe, prices could average $25 per million BTUs this year, for instance. So companies with more access to European markets may be in relatively better shape.
With several operators planning to release fourth-quarter-earnings reports this week and next, Gruber picked which could be most resilient to lower natural-gas prices. He looked in particular at free cash flow yield, a measurement that divides a company’s expected free cash flow per share by its share price.
Among the companies with resilient free cash flow is
Marathon Oil
(MRO), which makes more than three-quarters of its revenue from oil. Marathon’s free-cash-flow yield this year should be around 13%, Gruber projects.
APA
(APA), a multinational producer with offshore and onshore wells throughout the world, also ranks high on Gruber’s list. He expects its free-cash-flow yield to be 12%. APA’s exposure to international natural-gas prices means it can probably keep buying back shares at a fast pace.
And
Diamondback Energy
(FANG) should be able to yield 11%, given its higher weighting in oil.
Among smaller names, Gruber thinks
Chord Energy
(CHRD) could get to an 18.3% yield, and pay a substantial amount back to shareholders.
But others are likely to see sharp cash-flow declines from 2022 levels. Coterra’s large exposure to U.S. natural-gas prices means it’s vulnerable to the drop in prices, and the free-cash-flow yield could fall to 6%.
Ovintiv can cover its dividends and buybacks, but the price drop will hurt, and its yield could drop to 8%. EOG’s cash flows are also expected to fall, but overall should remain “resilient” despite the impact of lower gas prices, Gruber wrote.
Devon could see its yield fall to about 8%, reducing the amount available to send back to shareholders as dividends. Devon became particularly popular among investors last year because it pays out a portion of the cash flow in the form of a variable dividend, and its total dividend yield sometimes reached into the double digits. Gruber thinks the company will continue buying back shares, however.
Write to Avi Salzman at [email protected]