After a warm fall, colder weather has finally moved into the northern U.S. Up till now it's been good news for homeowners but bad news for natural gas companies and their investors. How winter plays out going forward remains to be seen. The latest NOAA prediction is for a warm winter in the west but normal temperatures in the east.
Last April, U.S. natural gas bottomed at $1.91/MMBtu (Henry Hub). Now the price hovers around the $3.50 mark. Before the abnormally warm fall, some forecasters were looking for $8 gas this winter.
Low priced North American gas, though, is an anomaly. Elsewhere in the world, gas fetches 3-4 times the U.S. Henry Hub price (see chart). Except for North America, which has no Liquefied Natural Gas ((LNG)) export terminals, gas is a major trade commodity across the world.
Transportation issues (gas can literally vanish into thin air) usually make natural gas a local market. But improving infrastructure such as new and enhanced pipelines, gas compression technology, and LNG export terminal construction, is steadily overcoming the obstacles.
The reason for the North American glut is, of course, fracking. No one anticipated the huge quantities of gas which fracking would dump onto North American markets. Indeed, most experts back in 2009 predicted a natural gas shortage. Back then, companies like Cheniere (LNG) were rushing to build LNG import terminals. Now, in an abrupt reversal, Cheniere is converting import terminals to export ones.
Amazingly, there are no LNG export facilities in North America, though the business is thriving worldwide. Once the several LNG export facilities now planned are complete, that will change.
Why North America's Natural Gas Surplus May Be Ending Sooner Than You Think
Two major trends indicate that the natural gas glut may soon be over. First, shale gas wells have steep production decline rates. One year production declines of 80% or more are not uncommon. New wells release an enormous burst of gas when first put into production but rig counts are now falling steeply. Second, cheap gas has resulted in a rush by power companies to convert or build gas powered electric plants ramping up demand.
Also contributing to rising gas demand is a small but accelerating move to gas powered vehicles - especially truck fleets.
So there you have it. Supplies of natural gas are falling while demand is skyrocketing - a classic case for higher prices.
Look To Reserves - Not Production
Today's top U.S. natural gas producers (see list here) sell their gas into a low-priced - at least for dry gas - market. Investors may be better off buying companies which have extensive, conventional gas reserves, reserves which can be accessed in the future when prices are higher.
In this light, two companies stand out: Anadarko Petroleum (APC) and Ultra Petroleum (UPL). Thanks to huge, mostly unexploited, gas reserves both Anadarko and Ultra should benefit greatly in the future.
Anadarko is a large international oil and gas company which has major operations in the U.S., Africa, and elsewhere. The company is known for its deepwater expertise and has an offshore presence in Brazil, the Gulf of Mexico, and Africa. In the U.S. Anadarko has large gas reserves in the Rockies (Utah, Wyoming, and Colorado),Texas (Eagle Ford Shale), and Appalachia (Marcellus shale).
What makes Anadarko especially exciting from a natural gas perspective is its recent massive natural gas discoveries offshore Mozambique. The company is also planning an onshore LNG project in Mozambique. Once the gas is on an LNG carrier it can be shipped worldwide to the most profitable markets.
Anadarko is profitable now thanks to its oil and condensate production. The company can afford to wait until gas markets improve. Anadarko's 2012 third quarter saw revenue up 4%. Operating income also was up but the company's Deepwater Horizon settlement costs weighed on results and discretionary cash flow from operations was down. Yahoo finance shows a forward P/E of 18.5 and a trailing P/E of 20.
Ultra Petroleum, unlike Anadarko, is a nearly pure play on natural gas. The company's major asset is the prolific Pinedale and Jonah fields of Wyoming's Green River Basin where it claims 10 tcfe of long-life reserves. It also owns a significant amount of de-risked Marcellus Shale acreage in Pennsylvania. Ultra is known to be one of the lowest cost gas producers in the U.S. and has rapidly increased reserves over the years.
Ultra's 2012 third quarter saw revenue down 33% year-over-year because of low gas prices. Adjusted income (without writedowns) was $.67 per diluted share. Unadjusted income was a loss. Operating cash flow was $1.23 per diluted share. Yahoo Finance shows a negative trailing P/E and a forward P/E of 17.9.
Anadarko and Ultra Petroleum Compared
|Company||Market Cap||Total Debt||Current Ratio||Price 12/22/12||Book Value/Shr|
Source: yahoo finance
Low natural gas prices hurt both Anadarko and Ultra over the last few years. Anadarko is in better shape as it has been able to concentrate on liquids while waiting for gas prices to improve. Ultra, being an almost pure natural gas producer, has not had that luxury and has been struggling as result even though it is a low cost producer.
When natural gas prices do go up (and I feel it is just a matter of time), both Anadarko and Ultra-- thanks to their huge reserves-- should profit handsomely.
Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.