Natural Gas Stocks Could Have Banner Year in 2010

Nov.16.09 | About: The United (UNG)

Canadian production of natural gas has dropped 20% from its peak in April 2006 – or 3.6 billion cubic feet per day (bcf/d) – First Energy Corp. analyst Martin King reported last week. So the supply drop that the natural gas bulls have been waiting for is finally happening now – at least in Canada.

And at least one US energy expert says their country is only 6-12 months behind Canada’s steepening drop in natural gas production.

Calgary based King estimates that supply is dropping even faster now, with September and October production down 11%-13% from just one year ago.

This should translate into a strong rise in natural gas prices by next spring, he concludes, unless North America has a warm winter.

In a three page note on November 12, King said that natural gas production has fallen from 17.3 bcf/d in April 2006 to an estimated 13.8 bcf/d in October 2009 – wiping out all of Canada’s production gains over the 11 years up to 2006.

And he warns “The current very slow pace of drilling activity, which has so far shown little sign of a seasonal uptick into the winter drilling season, is simply far too low to sustain production in the basin.”

October natural gas production was actually up marginally, as Canadian producers brought back online all the gas they had voluntarily shut in during the low prices of September. October production was lower than August – a continuing sign that the natural declining production of gas wells is taking hold.

King’s data shows that production is even dropping in British Columbia, where two new huge natural gas discoveries – Montney and Horn River – have been made in the last two years. But a lack of pipeline capacity to carry the gas to market has slowed the growth in actual production there.

The same situation is developing south of the border, says Chicago-based Bill Powers, publisher of the Powers Energy Investor, a financial newsletter specializing in the energy sector. Large decline rates in US gas wells will soon see the American production data mirror that of Canada.

“Martin King’s numbers are showing that Canada is a little further ahead with where we are (with decline rates),” says Powers. “The dropoff that is occurring in Canada is probably 6-12 months ahead of the US in the falling down of production, and it’s coming in the US, and it will be more pronounced.”

Powers is preparing a detailed article for subscribers on which gas plays will be declining in production, and by how much, and which ones will be gaining. At the end of the day he sees almost a 10 bcf/d supply decline in the US over the next 20-24 months, with Canada and the Gulf of Mexico being the big decliners.

(Canadian natural gas exports to the US have already declined from 4.2 bcf/d in 2005 to 2.4 bcf/d in the first six months of 2009, statistics from Canada’s National Energy Board show.)

Powers adds “What happens if the Canadian winter drilling season is a washout? There could be very little drilling for gas in the new BC areas of Montney and Horn River when they can’t get it out for up to 3 years anyway, and why drill for gas in this low price environment?

“The wells are expensive in these locations, and they are money losers at these gas prices.”

Lastly, he hinted that some of the big natural gas producers in the US could also be cautious in spending money on new wells next year, as their profitable 2008 hedges run out. Powers says their balance sheets have been hurt badly by the amount of drilling they either had to do this year to earn land, or chose to do in order to keep cash flowing during low prices.

Both Powers and King are natural gas bulls for 2010.

Disclosure: None