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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

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The utilities, as a group, have been somewhat forgotten this year. Growth stocks and stay-at-home plays have dominated the headlines, and indeed powered the indices higher, but for long-term dividend-oriented investors, value abounds in the utility space. One such example is UGI Corporation (UGI).

The stock fell by half from pre-COVID levels to the bottom in March and has since rebounded nicely. However, the stock has carved out a channel since June, chopping more or less sideways since then. As of now, UGI has seen several strong up days, and is threatening a breakout of that channel, which would mean a move above $36 that is sustained. I cannot say for sure that a breakout is coming, but conditions are right, so that is something to keep an eye on.

We can see that the gas utilities group has been unbelievably weak this year against the broader market, but that is to be expected during a raging bull run. UGI has outperformed its peers in a huge way since the March bottom, so I think it is set up well technically, with well-defined resistance and support in the channel I mentioned, and a clear breakout level.

Fundamentally, I like UGI as well, and I see it as a buy.

A history of growth

Growth can very obviously be challenging to come by when you’re looking at utilities. It’s a very unique model where governments and regulatory authorities get to decide how much the company charges for their product, which necessarily limits revenue expansion. However, utilities are free to acquire customers and indeed, other utilities, in order to gain scale. Over time, UGI has done just that.

Source: Seeking Alpha

Revenue growth has been choppy in recent years, and this year is almost certainly going to see a lower

TreeHouse Foods, Inc. THS is benefiting from its focus on refining the portfolio and enhancing organic foods offering. Apart from these, the company is gaining from higher demand stemming from coronavirus-led stockpiling and increased at-home consumption amid the coronavirus outbreak.

Let’s discuss.

Burgeoning Demand & Impressive Outlook

Higher demand amid the coronavirus pandemic bolstered the company’s second-quarter 2020 results, with the top and the bottom lines advancing year over year. Also, earnings beat the Zacks Consensus Estimate. TreeHouse Foods’ retail business catered well to the unexpected rise in demand amid the pandemic. This compensated for softness in the food-away-from-home business and distribution losses. Further, adjusted EBITDA from continuing operations rose 13.1% on productivity gains and improved channel mix.

We note that several other food companies like Flowers Foods FLO, General Mills GIS and Conagra Brands CAG are also gaining on higher coronavirus-induced demand.

Meanwhile, TreeHouse Foods is pleased with its second-quarter performance amid the coronavirus crisis. This along with expectations of continued rise in demand conditions and prudent reorganization actions prompted the company to raise guidance for 2020. Revenues are now expected toward the upper end of its previous guidance of $4.10-$4.40 billion. Additionally, adjusted earnings from continuing operations are expected in the range of $2.55-$2.75 per share compared with $2.40-$2.65 projected earlier.

Other Factors Driving TreeHouse Foods’ Performance

TreeHouse Foods has always been focused on expanding its product offerings through acquisitions. In February 2016, the company acquired Private Brands business for $2.7 billion. The Private Brands Business is a leading manufacturer of private label refrigerated and shelf stable products in the bars, bakery, cereal, condiments, pasta, and snacks categories. The addition of Private Brands boosted revenues and lowered debt. TreeHouse Foods’ other acquisitions include Flagstone Foods, PFF Capital Group, Inc. (“Protenergy”), Cains Foods, L.P., Associated Brands, and Naturally Fresh,

Betsy DeVos’s attempt to take CARES act money intended for public schools and direct it to private schools was knocked down by federal courts not once, not twice, but three times, with the third strike being final. But now some Pennsylvania legislators are getting ready to try a similar sleight of hand with $500 million in taxpayer funds.

House Bill 2696, the “Back on Track” bill, proposes to give a $1,000 voucher to parents for every K-12 child. This particular voucher format is the education savings account, a chunk of money set aside by the state that parents can spend on any qualifying education expenses, using an electronic transfer— a sort of educational debit card.

Parents would have to apply for the voucher, and money will be awarded on a first come first served basis. An initial period earmarks the money for families below 185% of the federal poverty level, but after November 16, any family may apply. The family can hold onto that money up until two years after the student has graduated from high school.

The allowable expenses include tuition and fees, textbooks, school uniforms, testing costs, instructional materials, computer hardware or software, counseling services, and “other valid educational expenses.” Providers are not allowed to offer kickbacks to parents.

The problem with this sort of voucher program has always been accountability. In 2018, auditors found that Arizona parents had mis-spent something like $700K in voucher money on beauty supplies, clothing and sporting goods. The Pennsylvania bill allows that the state treasurer “may provide for audits of an account” if the office determines it’s necessary. But we are talking about the possible oversight of a half million accounts, and the bill offers no additional staff or funding to make that oversight possible.

Meanwhile, there is also little accountability

While most stocks underwent a correction in September, beaten-down coal companies were among the few that actually saw strong performance. The coal ETF (KOL) rose about 5% with names such as Arch Resources (ARCH) rising a staggering 33%.

Most of the gains have been in metallurgical coal producers that supply coal to steelmakers. There has been an uptick in demand for met coal from China which has caused prices and sales volumes to rise. Thermal coal (used for power) has been a bit weaker but has also seen an uptick in prices and sales volumes.

Interestingly, Alliance Resource Partners (ARLP) has been left out of the rally. The company produces both thermal and metallurgical coal. The stock is trading at nearly its lowest price ever despite recently seeing an uptick in sales and prices. The company is no doubt in a difficult position after seeing sales decline over 50% Y/Y last quarter.

That said, the company had a positive demand outlook for Q3, and recent events in the coal market indicate that demand is indeed rising. Natural gas prices are higher which should boost competitive demand. China recently looked to increase coal imports due to a shortage, which was made worse by a mine collapse and corruption probe. If this continues to cause coal prices to rise internationally, ARLP’s export business should see greater profitability and demand.

A Closer Look at ARLP’s Valuation

ARLP has declined about 15% on generally positive news this month. Of course, with the equity market as a whole seeing higher volatility this month many investors may be selling ARLP in order to shore up liquidity. Though the company historically pays an extremely strong dividend that would equate to a yield of 50%, it is currently suspended as the company uses cash flow to reduce debt