Who Is Henry Hub?
Natural Gas Prices Explained
We don't all immerse ourselves in energy.
If I told you XOM beat analysts' Q4 EPS estimates this week at $1.97 on revs of $121.6 billion, you might look at me cross-eyed.
You might understand a bit better if I said Exxon (NYSE: XOM) posted fourth quarter earnings this week and earned $1.97 per share on revenue of $121.6 billion, beating Wall Street expectations.
Sometimes things are unnecessarily complex. Industry jargon, false assumptions about what people already know, and a deliberate effort not to 'give too much away' often make even the simplest energy-related topics difficult for retail investors to understand.
It shouldn't be that way. And we do our best here to offer insights to the market in a way everyone can understand.
With that in mind, I've been receiving more inquiries about 'Henry Hub' than I can ignore. In fact, my Web team tells me tens of thousands of people search for information about the topic every month.
Search no more, fellow readers...
Who is Henry Hub?
Henry Hub isn't a person, but rather a thing. Specifically, it's the central location (hub) for the pricing of natural gas futures contracts in use since 1990.
A BTU is the amount of heat required to increase the temperature of a pint of water (which weighs exactly 16 ounces) by one degree Fahrenheit.
Since BTUs are measurements of energy consumption, they can be converted directly to kilowatt-hours (3412 BTUs = 1 kWh) or joules (1 BTU = 1,055.06 joules).
MBTU stands for one million BTUs, which can also be expressed as one decatherm (10 therms). MBTU is occasionally used as a standard unit of measurement for natural gas, and provides a convenient basis for comparing the energy content of various grades of natural gas and other fuels.
One cubic foot of natural gas produces approximately 1,000 BTUs, so 1,000 cu.ft. of gas are comparable to 1 MBTU.
MBTU is occasionally expressed as MMBTU, which is intended to represent a thousand thousand BTUs.
It's owned by Sabine Pipe Line LLC, a subsidiary of Chevron (NYSE: CVX).
Located near Louisiana's Gulf Coast, the hub connects to four intrastate and nine interstate pipelines owned by various public and private pipeline operators like The Williams Companies (NYSE: WMB), Enterprise Products Partners (NYSE: EPD), and others.
It has two compressor stations that can compress 520,000 decatherms per day (one therm equals 100,000 British therm units).
The entire hub can transport 1.8 billion cubic feet per day (Bcf/d).
Natural Gas Prices
In late 1989, Sabine was selected by the New York Mercantile Exchange (NYMEX) as the official delivery mechanism for the world's first natural gas futures contract.
Natural gas is priced in units of one million British thermal units (MMBtu).
A standard NYMEX natural gas contract is for 10,000 million British thermal units and uses the average of the natural gas prices from Henry Hub's 13 interconnected pipelines.
Contracts expire 3-5 days in advance of the first day of the delivery month, and can be traded up to 72 months in the future.
When you hear someone say, “Natural gas is trading for $XX,” they're referring to the Henry Hub price for the current month's contract.
Right now, natural gas is trading for $2.35 per million British thermal units. That's the Henry Hub price for March 2012 contracts.
If you hear someone talking about "spot price," that's the Henry Hub price at that moment in time — not associated with a future contract.
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I have an ulterior motive for this educational session...
Natural gas prices are now the lowest they've been in a decade, and it's all because of increased supply.
Newfound shale gas supplies have led a bevy of drillers large and small to push U.S. natural gas production to the highest levels ever.
The Associated Press reports: “Supplies in storage are well above average, and some experts estimate the nation has enough natural gas to meet its needs for a century.”
That's probably good news for you, because more than 50% of U.S. homes use natural gas for heat.
With the price so low, some “experts” have floated the idea that large drillers like Exxon should curb production to allow prices to rise. But its fourth quarter report, released this week, showed the company hasn't slowed down at all.
When asked why, Exxon investor relations chief David Rosenthal said, “We remain bullish on the future of natural gas as an energy source.”
So do we.
And it's why, as low natural gas prices help save money on your heating bill, we've been showing you how to add money to your bottom line by investing in the most valuable drillers and service companies bringing all this gas to market.
Call it like you see it,
Nick is the Founder and President of the Outsider Club, and the Investment Director of the thousands-strong stock advisory, Early Advantage. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.