TARGET PRACTICE

Shares in Amazon.com, Inc. crossed the $3,000 mark for the first time this morning, as the e-commerce giant has enjoyed a 64% surge year-to-date. 

That move has caught AMZN’s scores of Wall Street admirers off guard.  The company boasts 52 “buy” ratings, compared to just four “holds” and one “sell,” yet the average price target stands at just $2,810, or 8% below current levels.  Only 10 of the 52 self-described bulls assign target prices above today’s $3,057 closing price. 

Enter the Oracle of Omaha. Berkshire Hathaway announced yesterday that it will acquire most of Dominion Energy, Inc.’s natural gas transmission and storage assets for $9.7 billion including debt.  That’s Berkshire’s largest acquisition since its 2016 deal for Precision Castparts Corp.  

The appearance of Berkshire and its chairman Warren Buffett is welcome news for some industry watchers. “This looks like confirmation that commodities like energy are undervalued,” Bill Smead, chief investment officer of Smead Capital Management, told Bloomberg. “At the bottom, assets move from weak hands to strong hands.”

Recent price action would test even the heartiest bull’s conviction.  Natural gas prices have remained in the dumps, reaching a fresh 25-year low of $1.48 per million British thermal units last week following a larger-than expected weekly supply build.  It’s a familiar tale: Daily output has jumped by 60% over the past decade.  By contrast, demand has grown by just 30% over that period. 

But while lockdown-related economic disruptions have thrown demand for a loop, supply disruptions could linger, and potentially help spur better fundamentals and recovering prices.  In late April, CNX Resources Corp. guided 2020 production to fall 5.6% to 510 billion cubic feet equivalent and projected they will drill just 25 new wells annually from 2022 to 2026, down from 84 and 76 wells in 2018 and 2019, respectively.  The Energy Information Administration forecasts that total U.S. output will fall below 91 billion cubic feet per day in February and March 2021, compared to a peak of 103.5 bcf/d in November of 2019.   Shale oil output, which yields so-called associated natural gas, has been a major contributor to the glut.  That, too, is easing, with the EIA cutting its June production estimate to 7.725 million barrels per day, down from 9mbpd in March as the pandemic took hold. 

In addition, regulatory and environmental considerations look potentially to wreak further havoc on the supply chain. In the past two days, Dominion Energy announced that it and partner Duke Energy Corp. will scrap the Atlantic Coast natural gas pipeline on account of “cost uncertainty,” while a federal district judge ordered Energy Transfer LP to shut down its Dakota Access pipeline by August 5th, until the U.S. Army Corps of Engineers completes a new environmental impact statement. 

“I would expect this to be a turning point for new investment,” Katie Bays, co-founder of Washington-based Sandhill Strategy LLC, tells Bloomberg. “There is real investor fatigue around this parade of legal and regulatory headwinds to energy projects.” 

With sentiment and price action similarly grim, might Buffett’s latest move presage better days ahead? For a survey of opportunities in natural gas, see the May 1 edition of Grant’s. 

Another strong bull move left the S&P 500 higher by 1.5% on the day to narrow year-to-date losses to less than 2%. Treasury yields ticked a bit higher, with the long-bond rising to 1.44%, while gold rallied again to $1,795 an ounce and WTI crude finished near $41 a barrel.  The VIX managed a green finish despite the rally in stocks, settling just below 28. 

– Philip Grant