The Bullish Case for Natural Gas 32 comments
an article to
-
Font Size:
-
Print
- TweetThis
The reader says...
.....read the XTO and EOG and RRC and FST and CHK conference calls.. Those guys are some of the best in the business and I haven’t seen them this bullish in years. There are good discussions about why nat gas production is about to fall off the cliff in Q4 and that all the focus on the storage numbers each week is irrelevant.
EIA published its last production report and it showed a 0.8% DECLINE in production in May even though production in Louisiana and Oklahoma grew. It is called the EIA-914 monthly natural gas report. Big decline curves in Texas combined with the drop in rigs is finally showing up in the numbers. But I have been in this business 25 years and know”it doesn’t matter until it matters”.. And since 90% of “investors” are really just day/swing traders, none of those guys are paying any attention to what is really going on..
Things you will hear on the calls..
- EOG is completely UNHEDGED for 2010.
- CHK took OFF hedges for the back half of 2010.
- XTO is 40% hedged at $10 mcfe and waiting to put more on.
- FST is seeing production declines in the Rockies.
- EOG and CHK have internal models that are predicting 2-5 BCF declines by next year.
- ECA and CHK are starting to shut in production.
Basically it comes down to big decline curves in Texas more than offsetting the ramp in production in the Marcellus and Haynesville and the hurricane damaged production in the Gulf versus the weather (el nino) versus industrial production usage returning..
Here is the report he references:
EIA-914_ Monthly Natural Gas Production Report
From the EOG Resources (EOG) earnings call:
Our view of the North American gas and oil markets is consistent with our previous earnings call, except that we've become more bullish regarding 2010 and 2011 gas prices. We still expect North American gas prices to remain quite low through year-end. As you know, we've historically devoted a lot of work to developing domestic gas supply models and we think our
current model is the most granular and best we've ever built. It's telling us that December 2009 domestic production will be 4.8 Bcf a day lower than year-end 2008 and this deficit will deepen further throughout 2010.
When added to the Canadian supply drop of at least 0.8 Bcf a day, we expect the gas market to turn sometime early in 2010 almost regardless of what happens to LNG imports. Everybody seems to be focusing on the supply growths from new horizontal plays, but the 800 pound gorilla in the
room is Texas vertical gas production. This represents the largest single block of production in the U.S. 16.3 Bcf a day in December '08, and the rig count here has fallen from 450 rigs in January 2008 to 145 rigs today.
Our model shows production from this large segment of domestic production will fall from 16.3 Bcf a day at year-end '08 to 13.2 Bcf a day by year-end '09 and then 11.6 Bcf a day by year-end 2010 down 4.7 Bcf a day over two years. In my opinion, this is the most important well population that people should be focusing on if they want to understand what's going to happen to gas supply over the next 24 months.
From the XTO Energy (XTO) earnings call:
If we just take a little look at U.S. gas production for a moment, we from the very beginning have said you would not see U.S. gas production drop until May. Looking at the EA 914, you're down about half a B a day from April to May, which is what we anticipated.
If you were to maintain that same fall for the next seven months of the year, you could potentially be down four Bs a day in U.S. natural gas productions. We'll wait to see but that's not an unreasonable number. If we look at EA 914 and break it down to onshore only, we've actually been down five in the last seven months and we're off 1.7B a day just in U.S. gas production onshore.
What's made the difference is onshore has been coming back on because of the hurricanes and is up 1.1B today and that's the real difference in what you're seeing. So I think you are seeing the decline that we've all talked about with U.S. natural gas recount dropping from 1600 to 675, and you will continue to see that, which should set you up for rebound in natural gas prices going forward.
If you're over supplied 3 or 4Bs a day that would indicate you should be balanced by the end of the year. Obviously, there's a lot of the year left to go. We do have the next 90 days will be very interesting as storage is relatively full at this point in comparison in history, and you may have some gas on gas competition as you get into the September and October timeframe. But I think we are setup as we've all talked about for a rebound in natural gas prices in '10.
From the Chesapeake Energy (CHK) earnings call:
I would point out, though, that with the rig count having dropped, for natural gas, to well below 700, and kind of leveled out in the 675 or so rig count range, that really sets the stage for natural gas prices to decline materially into the back half of this year and the first half of next year.
We have seen a slow steady climb in gas production from 2005 through March of 2009. And it's leveled off to a very slow sequential decline through the summer, but that should pick up dramatically and we can see production decline on a year-over-year basis, of perhaps as much as 2.5 to 3 Bcf per day by the end of the year, approaching 5 Bcf a day down year-over-year by late spring early summer next year.
More from CHK here
Now this will take some time but prices for natural gas simply cannot stay this low for very long. ANY economic recovery will push prices higher....fast..
Disclosure: Long UNG
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
"We do have the next 90 days will be very interesting as storage is relatively full at this point in comparison in history, and you may have some gas on gas competition as you get into the September and October timeframe. But I think we are setup as we've all talked about for a rebound in natural gas prices in '10"
From the EIA website, Peak working gas storage capacity as of mid-2008 is 3,789 Bcf.
www.eia.doe.gov/pub/oi...
Friday's storage was 3,089Bcf. I built an offline application to project where this could crest before extraction season begins using recent injection rates. It projects storage will exceed this limit by mid-October, which could trigger the scenario XTO talked about.
Added complication for those who use UNG is that contango breached 7% Friday, a nearly 3% increase in 2 weeks. The roll date in July 15-20 for UNG.
Summer cooling season so far has been moderate and with 10-day forecast highs generally in mid-80s for NY which is normal. No help there.
The last wild card is hurricanes.
Finally, energy prices have gotten help from the stock market rally. Any pullback there would be a negative.
From above XTO quote “a rebound in natural gas prices in '10.”
Seems most everyone agrees on above. The question is do you take a position now given the variables in play and hope for the best, or wait for a final washout? As of this moment, I’m waiting.
But i believe Natural Gas is done as a alternative, if it was to be, it would of been done, notwithstanding i believe it to be the best play!!!
By Johnathan Vrozos JV
johnathanvrozos.com
I do believe the future is in natl gas but I no longer trust any reports from any source on the subject. My guide is the price of CHK stock and when (or if) I ever make an annualized return of 6% on my investment, it will be gone.
The ratio of natl gas to oil has traditionally been 6:1 because that is the equivalent amount of energy produced by each. Price has not reflected the ratio, so the market is not working for one or the other.
That tells me there is market manipulation on some level.
The industry has now shown they can produce the gas needed for higher consumption so lets get these electric power plants switched to natl gas.
On Aug 10 08:32 AM Johnathan Vrozos wrote:
> CHK and Boone Pickens are definately bullish for LNG to go up as
> their profits are tied to it.
> But i believe Natural Gas is done as a alternative, if it was to
> be, it would of been done, notwithstanding i believe it to be the
> best play!!!
> By Johnathan Vrozos JV
> johnathanvrozos.com
Can anyone predict how fast production could ramp up if the demand rebounds?
It takes on order of *days* to drill a well. Interconnection is another story...and one that depends on the basin. The leases are allocated, and there are lots of uncontracted rigs, so it won't take long. Also, *consider* the dynamics of shutting in a slic-frac well. (and if you don't know the dynamics of shutting in that particular production, you probably should not be involved with NG).
If you cut gas exploration wells, you cut th most unprofitable if them first. Has some of these CEOs estimated how much the exploration reduction impacts output at an aggregate level?
Fact is that the market is riding the energy boom for years now. So it is no wonder there is huge overcapacity now. Companies like CHK are not far away from bankcruptcy and nothing more like call options on natural gas price. And this reader who does not want to get named probably is related to CHK in some way.
Debt ridden companies like CHK *HAVE TO* produce natural gas even at a loss to *MINIMIZE* their losses and to survive as long as possible.
Please stop talking such a bullshit if recent gas inventory numbers RIGHT NOW show that since May A LOT OF new gas inventory has been built up.
><snip>
> about for a rebound in natural gas prices in '10"
><snip>
From the EIA Natural Gas Weekly Update:
"For example, last week two natural gas producers, Chesapeake Energy and Chevron Corporation, announced production cuts as a result of the currently low natural gas prices. On Thursday, July 30, Chesapeake Energy reported that it may curb more gas production this summer or fall (similar to the cuts undertaken earlier in 2009) as a result of the current price environment. On Friday, July 31, Chevron Corporation announced that it would curtail its entire domestic on-shore natural gas drilling, focusing instead on crude oil drilling in the United States."
That's the start of the set-up for the 2010 temporary shortage to develop, I think. However, keep in mind that capped wells (not-shale) can be re-started quickly if infrastructure is available. Baker-Hughes reported +4 rigs (681) last Friday, a small number but showing that some are still preparing for the future. This is 58% below the peak 1606 or 8/29 and 9/12 last year. This about the average count of 2002 (691).
If you want to see what the trends *may* be forcasting, look at the 1st two charts here. Not I start pricing with October as September was not as consistent and I wanted the trends to be more visible.
seekingalpha.com/insta...
Net injection of 66 Bcf puts storage now 19%+ above 5 year average. If I recall, expected injection was about 61 Bcf?
I do think the rebound will come later, rather than earlier in '10.
EIA has predicted for awhile now that storage capacity would be exceeded if injections continue at normal levels throughout injection season. I do think it will be approached, even with the drop out of the two mentioned above.
I think the '10 winter will need to be at least normal, if not more severe, to cause increases to come and to hold in the early part of '10.
I've worked some more charts up, in preparation for my next article, that don't paint a pretty picture when combined with the economy's fundamental problems.
The energy bill will, I think, be needed to provide a major catalyst.
As you may recall, I've been near-term bearish from the get-go (but remember that I'm a n00b). I'm still in that camp.
A couple of positives may be the recent completion of another leg of a pipeline to feed the northeast. It has the potential to increase consumption in that critical area if we get a harsh winter or industrial activity rebound (which we should see a little this quarter as inventories are rebuilt).
NG is also now being diverted to Canada to assist with some problems they're having. I don't think it'll have that much effect though.
Until we get a good winter forecast (other than the NOAA one I've found so far), I'm not counting on weather. That leaves recovery of the economy as the only driver I see and I think it's not near, except for the short inventory restocking I mentioned.
HardToLove
"Despite the prices not seen in a decade, gas demand from industry remains moribund. But Nichols thinks continued production cuts will bring the gas market into balance sometime this winter, making those charts a lot more interesting. Maybe you should be picking up some of the NG ETF (UNG) on its next dive down to $12.50."
I don't believe that this winter will provide the impetus. People will be setting thermostats down, activity of drayage trucks (many of which have been converted to NG) at ports is down, NOAA forcast for winter is normal to slightly for 50% of U.S. (admittedly, not the best indicator) generation, feedstock and industrial use will all remain weak until we see economy turn-around.
UNG has (apparently) strong resistance at $13.50 although it has recently begun trading at substantial premiums (+4.14%) due to the SEC/CFTC (in)action.
However, we are entering the time when prices traditionally rise and it is reflected in the strips for the Henry Hub futures. I expect we will see a rise, but muted as compared to normal. See the link I gave basehitz.
Personally, I think we can now expect a good UNG entry to be below the $12.50 range, if you get it during one of the roll-forward days. However, I would only trade, not invest it.
Disclosure: long UNG short covered calls.
HardToLove
US is going to receive increasing supplies of LNG as terminal and pipelines have been built - will put further pressure on supplies. Meanwhile the economic recovery is nowhere in sight - so demand would be soft, actually declining. Don't bet on nat gas.
"So there is a tremendous amount of recently built-up new capacity that is idled and I think it will take quite awhile even after prices start to return on the gas front, before much of that trickles into the service side of things."
" NOAA forcast for winter is normal to slightly for 50% of U.S"
and he should have written " NOAA forcast for winter is normal to slightly *higher* for 50% of U.S".
HTL
On Aug 10 12:20 PM MarkitWacha wrote:
> Can anyone predict how fast production could ramp up if the demand
> rebounds?