The average price realized by Anadarko (APC) from its natural gas sales has started to rise after witnessing a steep decline in 2009 due to sluggishness in the global economy that caused a decline in commercial and industrial consumption. Anadarko competes with Chesapeake (CHK), ExxonMobil (XOM), ConocoPhillips (COP), British Petroleum (BP), and Chevron (CVX) in the energy and natural gas market.
The price of natural gas is influenced by several factors including current and anticipated supply and demand of natural gas, temperature changes, amount of gas stored, pipeline charges for transporting gas, and cost of gas for end users. We believe complexities associated with pipeline systems, gas storage and extraction, as well as declining production will drive natural gas prices up in the long-term.
While we expect the average natural gas price realized by Anadarko to rise gradually towards $7 per 1,000 cubic feet by the end of our forecast period, Trefis community members forecast that this number will exceed $8, representing an upside of 8% to our price estimate for APC stock.
We maintain a $72.82 price estimate for Anadarko’s stock, about 5% below market price.
Complexities in Storing, Extracting and Transporting Natural Gas
Unlike crude oil, natural gas cannot be stored anywhere. It is generally stored in underground reservoirs, and the pressure and type of reservoir can make injection and extraction difficult. Current low prices indicate the abundance of unusable and unstorable gas. However when demand picks up, storage and extraction will likely become a problem and will lead to an increase in gas prices.
It’s also difficult to transport gas in locations where terrain is rough or difficult to build. While the U.S. has an interconnected pipeline system, Europe’s pipeline system can only flow gas east to west which affects the free movement of gas across the continent.
Declining Production Could Pull Gas Price Up
Natural gas producers that are unable to sell or store their product either cap their wells, burn the gas or offer it for free. As production decreases due to low prices, the oversupply in gas is not expected to last very long, leading to an increase in prices.
Further, the availability of ready replacements for natural gas makes it less appealing. Natural gas can be replaced with either fuel oil or coal for energy generation purposes. When gas prices increase, power generators can switch to a cheaper alternative which would cause a decline in natural gas prices.
Trefis Community Forecast
The Trefis community forecasts that the Anadarko’s average price realized for natural gas will increase from roughly $4.5 per 1,000 cubic feet in 2010 to beyond $8 per 1,000 cubic feet by the end of the Trefis forecast period. Comparatively, our base estimates suggest an increase towards $7 per 1,000 cubic feet during the same period. The community estimates imply an upside of 8% to the Trefis price estimate for Anadarko’s stock, putting our number just above market price.
Drag the trend line in the chart above to see the impact of various natural gas price scenarios on Anadarko’s stock value.
Disclosure: No position