Natural Gas Prices' Routes amid Industry M&A Talk (Part 3 of 3)

(Continued from Part 2)

The massive gas production consensus and oversupply beat down natural gas prices. Gas prices fell 9% YTD (year-to-date). The lower natural gas prices are impacting small and independent oil and gas companies the most.

Oil and gas companies like Ultra Petroleum (UPL), Rice Energy (RICE), Exco Resources (XCO), Magnum Resources (MHR), and Rex Energy (REXX) lost the most in yesterday’s trade. These companies account for 7.80% of the Spider Oil and Gas ETF (XOP). XOP was also down by 2.82% on April 8, 2015. These companies lost more than 4% in yesterday’s trade. XOP consists of oil and gas companies.

These stocks have a cumulative market capital of $6.5 billion. All of these companies are sensitive to natural gas prices because they have a natural gas production mix that’s greater than 60% of their production portfolio. This means the majority of the revenue is generated through natural gas sales. So, lower natural gas prices impact the companies’ profitability. All of these companies’ stock prices lost more than 25% in the last year. Exco Resources, Magnum Resources, and Rex Energy’s stock prices are trading 70% below the stock prices last year.

These companies are increasing their natural gas production in 2015. The EIA (U.S. Energy Information Administration) projects that natural gas prices will average around 3.07 MMBtu (British thermal units in millions) in 2015. However, inventory buildups and oversupply factors are putting pressure on natural gas prices.

This could mean that lower natural gas prices will hit the companies’ earnings more. However, most of the E&P (exploration and production) companies hedged their own natural gas under production at higher levels for 2015 and 2016. Lower energy prices will also add pressure to their revenue and credit facilities.

Browse this series on Market Realist:

• Part 1 - Natural Gas Drops ahead of Inventory Data
• Part 2 - Will Natural Gas Break the Key Support of $2.60 per MMBtu?