As of Feb. 21, the nation’s gas in storage stood at 1.35 tcf. This is the lowest level since 2008, and the lowest level recorded in February since 2003. Inventories also hit these levels in February 2001. One thing all of these years have in common is that we entered injection season with inventories that were lower than average, and it took months to get the inventories back to normal range. And each of these winter seasons saw natural gas prices spike above $10/million Btu (MMBtu).

So far that hasn’t happened this year, although we have seen some spikes briefly go over $8/MMBtu. But history argues that even though inventories should begin to recover in 2 to 6 weeks, natural gas prices are likely to be higher this injection season than last year. In 2013 prices remained for the most part below $4/MMBtu until December, but this year’s inventory picture provides a strong indicator that prices will remain above $4 — with the possibility of higher spikes — throughout the rest of the year.

For investors, this presents an opportunity. The major natural gas producers should see year-over-year results that are better than they were a year ago. But surprisingly, some of the biggest natural gas producers have sold off recently on the perception of a flat to negative outlook in the months ahead. This pullback was caused by very short-term factors and has created some real opportunities given the likelihood that natural gas prices will remain elevated for months.

Conclusions

To be clear, my prediction of higher natural gas prices for 2014 was based on longer-term trends such as the construction of liquefied natural gas (LNG) export terminals and the phaseout of coal in power production. In fact, when I made this year’s prediction I wrote that short-term weather events such as “an exceptionally cold winter” can override longer term market drivers. This has been the case this year.

So while the longer-term market factors favor higher natural gas prices, the current inventory situation should also prove favorable this year for natural gas producers. It’s a win-win for these companies, and the downside risk appears to be low.

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

Portfolio Update

Bakken Windfalls Beckon    

Ahead of Robert’s promised analysis of oil market dynamics next week, it’s probably prudent to assume that crude has defied numerous crash predictions because global demand is keeping pace with global supply. Oil prices have been strong enough recently that today’s 2 percent bump based on the Russian invasion of Crimea looks almost routine.

So did the latest set of strong quarterly numbers reported last week by two of our favorite Bakken oil drillers, Aggressive Portfolio holding Continental Resources (NYSE: CLR) and Growth Portfolio pick Whiting Petroleum (NYSE: WLL). They have returned 42 percent and 37 percent, respectively, since we recommended them a year ago, and by the looks of the latest numbers are far from done.  

All Continental did last year was increase its proved reserves 38 percent even as total output grew 39 percent and crude production 71 percent. The company is forecasting production growth of 26 to 32 percent in 2014, and based on recent exploration and development trends seems more likely to exceed that guidance than to undershoot it.

Fourth-quarter results had some warts, in fact they missed estimates as the discounts on Continental’s crude relative to the benchmark widened, while the nasty winter limited production gains in North Dakota.

But the discounts, at least, should continue to shrink as the midstream infrastructure buildout in the Bakken continues, and in the meantime Continental is continuing to aggressively reduce well costs while developing new prospects. Its SCOOP play, for example (short for South Central Oklahoma Oil Province) has in less than two years gone from a gleam in founder Harold Hamm’s eye to a significant gusher now accounting for 16 percent of the company’s total output, with a return rate rivaling the Bakken.

As a result of these improved returns, Continental’s cash flow is gradually catching up to its capital spending. And while the company is certainly more highly leveraged than some of its competitors, to this point you would have to say that the leverage has been put to good use.   

The stock exceeded our original $110 buy below target in September, and now is an opportune time to raise it with new highs within reach. Buy CLR below $125.

Whiting doesn’t have quite the same growth profile as Continental but is more than its match on costs, while offering the more conservatively managed balance sheet. Whiting’s production grew 21 percent last year and the company is aiming to increase it another 18 percent or so in 2014. And that forecast doesn’t fully account for improved well completion techniques now delivering much higher production rates.

Whiting shares bounced smartly off their 200-day moving average early last month, and haven’t looked back. With our previously increased buy maximum hit again, we’re raising our sights. Buy WLL below $76.   

— Igor Greenwald

Stock Talk

We encourage you to engage with our analysts and your fellow subscribers on our website. To ask a question or post a comment related to a particular article, please do so in the Stock Talk field at the bottom of that article.

Or, to ask a general question, please go to the main Stock Talk page found under the Resources menu for each publication.