The #1 “Frac” Stock You Must Own NOW

Freedom Financial Archive | Originally posted Dec 02, 2022

Dear Reader,

As Old Man Winter approaches, the American public is nervous about access to enough natural gas. They have good reasons to be nervous.

You’ve probably heard about the tight supplies across many areas of the U.S. It’s all over the news. And it’s likely to remain in the headlines for months.

It’s important to note that while oil prices are set on a world market (with regional and quality variations based on sulfur content, viscosity, and transportation costs), natural gas is more of a regional market.

Natural gas prices in Europe are much higher than U.S. gas prices today because of the dependence of Europe on Russian sources. U.S. sourcing from the Permian Basin (brown), Marcellus Shale (green), and Bakken Formation (yellow) in North Dakota is much more secure and reliable.

It would be nice to believe that oil and natural gas prices are set by market fundamentals such as supply and demand, new investment, and new discoveries. But nothing could be further from the truth.

Biden’s (Fake) War on Oil

Oil and natural gas are so critical to national security, transportation, home heating and other critical functions, that prices are heavily politicized and manipulated for better or worse.

On the one hand, the Biden administration has declared war on carbon-based energy sources starting with oil and natural gas.

On day one of his administration, Biden closed the Keystone XL pipeline. He has since banned new oil and gas exploration leases on federal lands, handicapped the fracking industry with new regulations, banned offshore drilling, and used regulatory powers to stop the building of new refineries.

Biden has also pushed through new green scam legislation that showered hundreds of billions of dollars in subsidies for wind turbines, solar modules, electric vehicles (EVs), and EV battery manufacturing.

These bans, regulations and subsidies have tended to increase oil and gas prices by restricting supply.

On the other hand, Biden released 130 million barrels of oil (equivalent to about two days of global output) from the Strategic Petroleum Reserve (SPR) to suppress gas price increases ahead of the mid-term elections.

The SPR was intended to bolster U.S. national security by supplying a reserve in case of a major supply disruption due to war, natural disaster or infrastructure failure. It was not intended as a political price manipulation tool. But that’s how Biden used it. This was partly responsible for the recent decline in oil prices.

Energy price manipulation is not limited to the United States. OPEC+ (the core OPEC plus Russia, which really amounts to Saudi Arabia + Russia) agreed to reduce oil output recently. This put some upward pressure on oil prices. The effect was limited because most OPEC members were operating below their allowances, to begin with. Still, this did put a temporary floor under oil prices.

Now, that has been undone because OPEC+ just announced an intention to increase output. This is purely political since the de facto ruler of

Saudi Arabia, Mohammed bin Salman, or MBS, is in negotiations with the Biden administration for immunity against prosecution in the U.S. for the murder of Jamal Khashoggi.

In effect, MBS threw Biden a bone. Russia is already selling all the oil it can, so this output increase is also unlikely to have a major impact.

Natural gas prices in Europe were subject to the ultimate manipulation when state or non-state actors blew up the Nord Stream 1 and 2 pipelines that deliver natural gas directly from Russia to Germany.

This is intended to prevent Germany from making a separate peace with Russia. The latter has no leverage now. It can’t deliver more natural gas in the short run if it wanted because the pipeline capacity is greatly diminished.

With winter on its way, European demand for oil and gas will soar as will prices. Germany will encounter shortages and will have to ration available supplies and shut-down manufacturing to preserve natural gas supplies for home heating.

The economic consequences of this will be devastating.

U.S. natural gas supplies have been diverted to Europe to alleviate shortages.

This means shortages will emerge in the U.S. and natural gas prices will surge here also. While oil and natural gas and not easily substitutable for each other, the higher gas prices will drive oil prices higher as energy suppliers scramble for any available sources of supply.

The Biden administration promises action to fight high prices for gas and diesel. However, this administration has only made politically expedient, short-term-oriented moves like the aforementioned draining of the Strategic Petroleum Reserve.

Natural gas prices in Europe have cooled off in recent weeks as demand has slowed. However, prices will surge again once meager storage levels get drawn down this winter.

Near-record low inventories for this time of year have put a bid under the market, keeping the price of natural gas high.

By “put a bid under the market,” we mean there are buyers thanks to a supply reduction.

Below is a chart of natural gas inventories from 2007-2022. The thick, light blue line is this year’s inventories over the months.

Storage sits at the low end over the last 15 years, and yet demand holds across the U.S. It’s at the same level as it was in 2014, with only 2018 at a lower point over the same period.

We have a bit of a different setup this time around with liquified natural gas (LNG) exports well above previous years.

There is also more US export capacity coming back online as repairs to the Freeport LNG natural gas export facility is almost complete after an explosion earlier this year.

This has helped tip the U.S. into one of the most bullish setups for natural gas companies and their underlying exploration and production (E&Ps) companies in a very long time.

We know a company that stands to massively benefit from this setup. But more on that company in a bit.

The War and Natural Gas Prices

As the U.S. and EU’s position on Russia holds steady, the estimates for natural gas into the next decade have spiked. At one point, we were looking at $6.50, a full 85% higher than the $3.50 price in 2019.

Also, the Russians have been sending gas to China and India. They’ve happily taken the discounted gas and sold it back to Europe at the market price.

Everyone makes out:

  • Russia can still sell its gas, though at a discount to its strategic partners.
  • China and India pay cheaply for desperately needed energy and can still sell the surplus onto Europe.
  • Europe’s hairy-arm-pitted femi-greens get to virtue-signal their way to a frozen winter, no industry, and sleeping in their ski suits.

As Charlie Sheen would say, “WINNING!”

Russia invading Ukraine has pushed more natural gas by pipe to China and reduced China’s need for LNG cargoes.

At the same time, Europe has reduced its piped natural gas but increased its imports of LNG.

“Honey, the Fridge is Empty…”

There has been a lot of talk about European natural gas storage, and it is being used as a reason to show how “overblown” the market fear is regarding winter.

There is some truth behind the comments, but it is much more complicated.

There has been a huge hit to demand with shuttered petrochemical and fertilizer facilities as well as other industrial assets.

Refiners have been rolling out economic run cuts and smaller companies are naturally reducing consumption of electricity/natural gas due to prices.

The shift in demand has put more product into storage, but the cuts aren’t sustainable to have a normally functioning economy.

Germany is Closed for Business

The below chart shows the “successful” transition for Germany to reduce their consumption of natural gas but… at what cost?

Germans have seen a huge drop in industrial capacity including fertilizer, petrochemicals, refining, and other manufacturing industries.

So, while they have “achieved” their goal to increase storage, it came at the cost of crushing their economy.

German capacity utilization is also pushing lower. So, what happens when the government tries to “restart” the economy?

Even if the industries can afford natural gas, will there be any available?

Germany isn’t the only nation that has looked at rationing natural gas.

The below chart shows how many energy-intensive industries have cut production runs throughout the European Zone. The U.K., France, and other European nations have highlighted ways they will curb demand through rationing and rolling brownouts.

The shortages within Europe are going to keep them beholden to the floating market, which has been the main outlet for the region to fill the void. As you may know, pipeline gas is much cheaper than importing LNG by ship.

And while that will somewhat relieve the pressure to buy gas, it’ll come at a much higher price than it otherwise would have.

How important is LNG to the region?

These next three charts tell an interesting story.

First, on the top chart: since Europe has prohibited itself from importing cheap Russian pipeline gas, its supply has fallen off a cliff. To replenish its stocks, it must rely on LNG to fill the void.

The second and third charts look at LNG, Norway, Russia, and Algeria both in absolute numbers and as a percent of EU total natural gas imports.

First, LNG: at the beginning of 2021, LNG was a mere 20% of EU imports. Now, it’s 40%.

Second, Norway: though not a member of the EU, it’s a member of the European Economic Area. That means it gets a bunch of benefits of working with the EU without contributing to the EU budget. Also, members of the EEA are Iceland and Lichtenstein. Norway is now roughly 35% of EU natural gas imports, which makes up for much of the Russia shortfall.

Next, Russia: cheap Russian pipeline gas accounts for only 10% of EU imports. It used to be 40%.

And finally, Algeria. Why Algeria?

You may have missed it, but President Macron of France went hat-in-hand to the Algerians to beg them to open their natural gas spigot. As you can see from the charts, the Algerians are still sore about the horrific time they had as a French colony. They haven’t budged on Macron’s request.

What About US Exports?

Even with Freeport sidelined, we are still exporting about 6 million tons.,

And when Freeport comes back online, the U.S. will be back to about 7 million tons.

This is going to keep a steady flow of product moving offshore and helping support U.S. prices.

French President Macron has complained about “price gouging” in the U.S., but Henry Hub is the most liquid trading hub in the world for natural gas.

From Wikipedia:

The Henry Hub is a distribution hub on the natural gas pipeline system in Erath, Louisiana, owned by Sabine Pipe Line LLC, a subsidiary of EnLink Midstream Partners LP who purchased the asset from Chevron Corporation in 2014. Due to its importance, it lends its name to the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX) and the OTC swaps traded on Intercontinental Exchange (ICE).

The upshot is this: natural gas is a globally traded commodity whose price is discovered by the market. It’s practically impossible to set a price cap on it. Present-day French economists and their presidents find this hard to understand.

Instead, global demand for natural gas and availability concern are rising, leading to countries and companies trying to secure as much volume as possible.

While production has moved higher, we have also seen a rise in U.S. domestic demand for natural gas.

Also, there will be more demand and less supply as Cove Point (an LNG terminal in Maryland) conducts maintenance ahead of the winter push.

It’s a key reason the CEO of Kinder Morgan said that the U.S. is going to need another 20bcf/d of natural gas pipeline capacity built over the next decade.

This is needed to help debottleneck the market and get natural gas to the market.

But in the meantime, we are going to have some product stuck in the market.

The State of Europe’s Natural Gas Demand

Europe’s natural gas demand over this coming winter is seen 7% down from the past five-year average because of soaring prices. That’s still “notably below” the European

Commission’s target, according to Kateryna Filippenko, an analyst at Wood Mackenzie.

  • “There’s potential for even more demand destruction,” Filippenko said in a Bloomberg TV interview.
  • Further disruptions in Russian gas supplies to Europe are likely, with Moscow set to keep putting pressure on the bloc.
  • A potential slowdown in China due to COVID woes and comfortable storage levels in Japan may limit their appetite for gas, which is “good news for Europe.”

So, is above seasonally normal storage good?


But you need to look at the total picture.

The next question is this: What does Mother Nature bring for winter?

If there is a polar vortex, it will pull a significant amount of natural gas out of storage. And Europe can’t just buy more by pipe.

Instead, they will have to rely on the LNG market. That market will be expensive, as well as much tighter, given the time of year.

I agree with the view that some of the prices became absurd.

But to ignore the prevailing problems heading into winter just because they have natural gas in storage is crazy.

In short, the problems are far from over. And we will take advantage of that.

So, What Is Our #1 Frac Stock Right Now?

Southwestern Energy (SWN) was trading at over $20 when the natural gas curve was about $4 lower than it is today.

The company had a balance sheet problem due to its massive debt issue.

The hedge fund I was working for in 2015 had a large short position (at my recommendation) given the debt position, leverage to natural gas liquids (NGLs), and weakening natural gas prices.

The company is quite different from those years, and the market has changed considerably in that time as well.

Natural gas liquids and natural gas have seen their prices rally and remain more robust today since the shale revolution kicked off in 2011.

SWN has done two big deals since then.

First, the company sold its Fayetteville assets for about $1.865 billion, which helped to clean up their balance sheet and set SWN on a better foundation.

The sale was completed in 2018 and allowed the company to begin an aggressive balance sheet repair.

Once they stabilized, they then went out and bought GEP Haynesville LLC for about $1.85 billion.

This provided a significant uplift to their natural gas portfolio, and it moved them closer to Henry Hub and away from the bottlenecks that still plague the Northeast.

SWN has been able to increase their production of natural gas at the best possible time to capture strong pricing and send estimated revenue growth higher.

Southwestern is well-positioned in two of the largest natural gas basins in the world with more running room, as the U.S. is called upon to export a growing amount of LNG and NGLs into the global markets.

The growing revenue and controlled cost are driving EBITDA higher while the “balance sheet repair” story only continues to rill forward.

The company is in a fantastic position to keep driving forward and sending the stock price back over $20 in the coming few quarters.

Action To Take: BUY SWN up to $7.00 per share.

Kind regards,

Freedom Financial News