Fracturing Services Shortage May Boost Natural Gas

by: Kurt Wulff

A shortage of hydraulic fracturing services may be contributing to reduced natural gas drilling and thereby helping natural gas price to recover from a depressed level. Demand for high-pressure pumping equipment and skilled workers increases with the shift to horizontal from vertical drilling. It increases further as horizontal laterals lengthen up to two miles underground. Accordingly, frac prices may be two to three times normal according to Petrohawk (NYSE:HK) president Richard Stoneburner speaking on the quarterly call on November 2. A frac job in the Eagle Ford shale that cost Petrohawk $600,000 a year ago now costs $3.5 million.

The resulting speed bump in new supply development may slow the most rapidly expanding natural gas producers HK, Range Resources (NYSE:RRC) and Ultra Petroleum (UPL). Those three are the only stocks among 24 in our small cap and income coverage still trading below their 200-day average. Yet, all producers should benefit from the upward pressure on the price of flowing oil and gas. The six-year price of crude oil reached $91 a barrel on November 4, well above the $75 a barrel long-term price embedded in a McDep Ratio of 1.0.

Six-year natural gas appears to have found its bottom just above $5 a million btu. Natural gas storage is full and the peak winter demand season is about to begin. Buy recommendations Canadian Oil Sands Trust (OTCQX:COSWF) and Birchcliff Energy (OTCPK:BIREF) shed their Contrarian qualifier and rejoin buy recommendations Cimarex Energy (NYSE:XEC), Dorchester Minerals (NASDAQ:DMLP), San Juan Basin Royalty Trust (NYSE:SJT) and Hugoton Royalty Trust (NYSE:HGT) in stock price up trends.

Originally published on November 5, 2010.