(Reuters) – Equitrans Midstream Corp said on Monday it will evaluate the cost and timing of the completion of the Mountain Valley natural gas pipeline based on ongoing litigation and upcoming federal approvals.

FILE PHOTO: An aerial view of the under-construction Mountain Valley Pipeline near Blacksburg, Virginia, U.S. September 30, 2019. REUTERS/Charles Mostoller

The U.S. Federal Energy Regulatory Commission (FERC) gave Mountain Valley permission late Friday to resume some construction on its $5.4 billion-$5.7 billion pipeline, which runs from Virginia to West Virginia.

“As the litigation process progresses and as we receive additional information from FERC regarding potentially releasing the remainder of the route for construction, (Mountain Valley) will continue to evaluate its current construction plans, budget, and schedule,” Equitrans said.

Mountain Valley is one of several U.S. oil and gas pipelines delayed by regulatory and legal fights with environmental and local groups that found problems with federal permits issued by the Trump administration.

FERC suspended work on Mountain Valley a year ago due to litigation over the project’s Biological Opinion from the U.S. Fish and Wildlife Service (FWS), which allows construction in areas inhabited by endangered and threatened species.

The FWS issued a new Biological Opinion in early September. Environmental and other groups continue to challenge the latest FWS approval and other federal permits in court.

Analysts at Height Capital Markets said they expect the project to enter service in mid 2021 but noted timing could slip to the third quarter of 2021 if legal challenges prevent some stream crossings.

“We acknowledge the legal challenge that is currently before Fourth Circuit Court of Appeals and have agreed to temporarily delay stream and waterbody activities out of respect for that process,” Equitrans said.

Equitrans has said it expects the pipeline, which is about 92% complete, to enter service in early

October natural gas futures rolled to November at an over 60 cents per MMBtu contango. Contango is a forward premium in a futures market. The steep level of contango between the two contracts reflected the natural gas market’s seasonality as the October contract represents the injection season where stockpiles build. The November contract reflects the beginning of the withdrawal season during the peak time of the year for natural gas demand.

Natural gas stockpiles rise from March through November and fall from November through March each year. Meanwhile, 2020 is no ordinary year in natural gas and markets across all asset classes. The November 3 election will determine the President for the next four years and the majorities in the House of Representatives and the US Senate. One of the many issues facing voters when they go to the polls is the future of US energy production. Over the past years, technological advances in fracking and fewer regulations made the United States the world’s leading natural gas and crude oil producer. The Trump administration supports US energy independence; the Democrats favor alternative energy sources that reduce the carbon footprint. Therefore, the election presents a unique dynamic for the energy markets, which could cause increased volatility over the coming weeks, months, and perhaps years.

As natural gas moves towards the peak season of demand facing bullish and bearish factors. We should expect lots of price variance in the volatile natural gas futures market over the coming weeks.

Another storm in the gulf causes a lower high

Hurricane Delta was steaming towards the US Gulf Coast on Friday, October 9, as a Category 3 storm with life-threatening storm surge, damaging winds, and rainfall flooding from Louisiana and east Texas to Mississippi. The hurricane will hit the same areas ravaged by Hurricane Laura

Welcome to the long-time making edition of Natural Gas Daily!

Natural gas producers have gone through a much tougher period than oil producers. First, natural gas prices fell from $7/MMBtu average in the pre-2008 era, then prices averaged $3.50+/MMBtu between 2010 and 2014, and now, recently, where prices averaged sub $2/MMBtu for the first 6 months of 2020.

So, is it hard to believe that no one thinks an incoming supply led deficit will be sustained?

But as we wrote in an article a month ago titled, “Natural Gas Market Deficit Over Winter May Exceed 5 Bcf/D This Coming Cold Season.” Irrespective of the weather outlook over the winter, the bear case still has natural gas storage falling to the 5-year average due to the incoming supply deficit.

And it’s easy to understand why this is the case. Consider the following chart illustration:

Source: EIA, HFI Research Estimate

As you can see above, excluding other demand variables like power burn, residential/commercial, and industrial, you can see that the structural increase in US natural gas exports via LNG and Mexico will increase ~2 Bcf/d y-o-y.

On the supply side, we will have decreased ~9 Bcf/d y-o-y by the end of 2020.

This mismatch in supply and demand is why we said that this winter’s supply deficit could be as large at ~5+ Bcf/d, which would essentially eliminate the importance of weather and skew the natural gas market to the upside. This is also another reason why you see the winter contracts trading so high even before winter starts and despite bloated storage.

Source: CME

What we have going in the natural gas market is a really long-time in the making. Natural gas is the most evident market of the stupendous outspending by US shale producers. There’s no OPEC+ to intervene, and

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Southwestern Energy Co., natural gas production site


Julia Schmalz/Bloomberg

Natural gas prices could rocket higher this winter, and some producers could emerge from hibernation in much stronger shape.

Morgan Stanley analyst Mark Carlucci thinks

EQT

(EQT), the largest gas producer in the U.S., can do particularly well under those circumstances and he upgraded the shares to Overweight from Equal Weight in a note on Friday.

Southwestern Energy

(SWN), another gas producer, is also improving, and Carlucci upgraded its shares to Equal Weight from Underweight.

Natural gas prices have been depressed for years because there’s simply too much of it. Natural gas is a byproduct of oil production, and a boom in oil drilling in the U.S. has also led to an increase in natural gas supplies. But oil drilling has declined amid the pandemic and is likely in for a longer slump given depressed prices. So natural gas prices are back on the upswing. What’s more, the United States has been exporting a growing amount of gas in liquefied form, helping reduce the glut in the country. If more countries switch to natural gas from coal for electricity production, this trend could continue and even accelerate.

Some of that optimism about prices was already in the stocks, Carlucci says.

“However, as tailwinds build for potentially the tightest winter gas market of the past decade, near-term risk for equities now appears skewed to the upside,” he writes.

In fact, Carlucci thinks there’s a case for natural gas to rise as high as $5 per million British thermal units (BTU), which would be a remarkable increase given that it fell to $1.47 earlier this year, the lowest level in 25 years. Now, natural gas futures are trading around $2.76, up more than 20% on the year.

Investors appear wary of

The results are in for FY20 for United Natural Foods (NYSE:UNFI), and the highlights are pretty amazing (from press release):

  • Reduced outstanding debt, net of cash, by $388 million; year-end adjusted EBITDA leverage ratio of 4.0x
  • Net sales increased to $26.5 billion
  • Adjusted EBITDA increased to $673 million
  • Adjusted EPS increased to $2.72

Despite beating earnings and revenue estimates, and raising FY21 guidance, the stock has sold off over 20%. Some are attributing this to the CEO’s retirement announcement, but given the nine-month timetable on that decision, the explanation leaves investors wanting more. No UNFI thesis on Seeking Alpha has referenced the management team as a company strength, and if anything, the mistakes and debt burden from the Supervalu acquisition are a reminder of the team’s missteps.

Possible other explanations:

  • Q4 cash generation fell short of investor expectations
  • Relatively significant number of shares (~2m) granted to management, diluting investors
  • Lack of CEO successor
  • Lack of Whole Foods contract extension
  • Margin pressure on FY21 revenue

While all of these could be part of the story, I still don’t see it. It is true that management expects Q3/Q4 21 to be tough comps Y/Y, but the fact it continues to guide above expectations for revenue and EBITDA after a blowout year shouldn’t be taken for granted. It has a good track record of setting reasonable guidance it can beat, which is even more encouraging.

Regarding the Whole Foods contract, the last extension was announced Nov 2nd, 2015. I expect a similar announcement in the coming couple quarters, removing a significant overhang from the stock.

Valuation

Updating the valuation waterfall, I’ve included company guidance for FY21, assuming cash balance and market cap at current levels, and showing debt paydown of $310 which reflects EBITDA midpoint of $710m, less $225m for CapEx and