Investor sentiment is changing – to the positive – on natural gas. Despite record or near record injection levels into storage in the US most weeks, gas prices have remained steady or even risen. The number of drill rigs actively drilling for gas has barely budged, though it has been down in the US three of the last four weeks.
But the market believes slightly increased demand and slightly lower rig counts is enough to move the natural gas price in the US up between 10-15% in the last week. (Canadian gas prices are up 1-2%.)
The US gas market could really get a boost this week as early estimates for injection are between 60 bcf (billion cubic feet) and 100 bcf. Last year’s injection was 100 bcf.
But there are a couple of other ideas that the market is grappling with. Bill Powers, editor of Powers Energy Investor, has been one of the loudest voices proclaiming the current glut in gas will be short-lived as many conventional basins are declining rapidly.
One thing to remember is that when a market is bearish, it doesn’t want to look at good news (and vice versa). So Powers’ idea – supported by a slew of facts he has put together and is now writing a book on – isn’t mainstream enough to yet affect the price.
The other idea is that the total recoverable amount of gas in these new shale plays is not what the market believes.
Art Berman began giving a presentation as early as last December that the EUR (Estimated Ultimate Recovery) on these wells was much below the 20 years plus he was hearing from the industry. He plotted several graphs which he says shows that 63%-95% of the economic value in a shale gas well is used by the end of Year 5 – and should be shut in.
His data shows that 3.5‐5.0 Bcf is the highest average EUR for any Haynesville operator, and most are far lower, and yet a 5‐6 Bcf EUR is the threshold for break‐even economics because of high well cost ($7‐10.5 million).
You can read his blog here.
This theory is gaining increasing credibility in the market, despite the impressive sales job the industry has been able to do in convincing the market otherwise.
Another shale gas sceptic is Financial Times writer John Dizard. He has written a series of articles this spring that outline the great sales job he believes the natural gas producers have done convincing investors that shale gas can be economic at these price levels. You can read one of his several stories here.
For over a year now analysts in the US like Benjamin Dell have been saying that investors should not believe shale gas producers when they say, in their corporate presentations, that they can make money under $5/mcf gas. He suggested their financials showed otherwise.
All this has now got the market believing that rig counts will continue to decline, weekly injection levels will soon start moving below the five year average, and natural gas prices and stocks will move up.
Other factors include hurricanes in the Gulf of Mexico (GOM). The 2003-2008 years had lots of hurricanes, with Katrina being the most famous. Large amounts of natural gas production in the GOM was shut in for months at a time. I still believe the amount of water that shale gas uses could end up causing a stir in the market.
I have stayed away from natural gas weighted stocks for over a year – unless they were part of the Cardium craze in Alberta earlier this year, and this is one reason why the subscriber portfolio returned 146% in 2009.
But last year I also dedicated one issue to a few natural gas stocks that investors could consider on their own if they were determined to play. In one of my next two issues I’m going to briefly update those stocks, and introduce a couple new ones that have developed into intriguing OGIB portfolio prospects.
The timing on this upward move in gas could be perfect, as I have thought most gas stocks overvalued for a long time. But they now have gone lower as part of the downdraft in oil prices.
Disclosure: no positions, long or short