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The oil gas ratio hit a new record high today with gas trading at $3.11/mmBtu and WTI going for $101.25/bbl yielding an energy ratio of 5.61. In simple terms this means gas is trading at the equivalent of $18.05/bbl crude.

The market is starting to notice this rapid shift in natural gas economics. Back on Dec 10 I mentioned a few of the sectors, such as chemical processing, that would be likely winners due to lower priced gas. Companies are now starting to announce their plans to build new plants. Royal Dutch Shell PLC is planing an ethylene plant in the Appalachian region, Nucor is building a gas fired iron plant in Louisiana, Dow Chemical Co. is planning two new chemical facilities in the Gulf coast, and CF Industies is planning to boost its ferterlizer production made from gas. (WSJ, 12/27/2011, A3) . All due to relatively low gas prices. If LNG importers are not able to “reverse to flow” and turn into LNG exporters, then the price of gas can stay low until domestic consumption has a chance to absorb these lower cost supplies.

One of the other sectors that should benefit from the relatively high oil/gas ratio is the CNG (compressed natural gas) transportation buisness. In October I analyzed Clean Energy Fuels’ [CLNE] stock performance relative to the energy ratio and couldn’t really see any coorelation between the fundamental driver of their business (the oil/gas ratio) and their stock price. Checking back today I’m still not seeing any sustained improvement in the company’s stock price. So I’m still looking for the breakthrough in the transportation business.

In other news, shale gas is certainly affecting the price of electricity, both spot prices and prices offered for term contracts for renewables. In the western US, on-peak spot prices in southern California today were $30.37 $/MWh….lower then they were 30 years ago in 1981 when our company (www.henwoodassociates.com) started producing power. And the natural gas based market reference price (MRP) used by the California PUC for evaluating renewable projects is off about 15% from the last MRP posted by the CPUC.

While this is happening the solar sector is having problems with oversupply and a softening market. The oversupply is drivien by the rapid increase in Chinese production (including two IPOs in October and November - Changzhou Almaden and Sungrow Power). Coupled with German demand for 2011 reported to be 29% below 2010 levels two German producers, Solar Millennium and Solon SE filed for insolvency this month. The supply/demand combination is also driving layoff such at those reported at SMA, Suntech (NYSE:STP), and First Solar (NASDAQ:FSLR). And stock prices for solar companies, as measured by the solar ETFs KWT and TAN, have dropped by over 60% YTD and their market cap has fallen below the $70 million level that was related to me as a break-even size for an ETF. In fact, all of the sponsors of sector specific ETFS – KWT, TAN, FAN, PWND, GRID – are losing money on their offerings if this is still the break-even number. Which one will close up first like the progressive transportation ETF did in 2010?

How much of the market woes facing solar producers stems from gas competition? I’m not aware of any analysis of the relationship of subsidies and RPS mandates to gas prices in the US, but reason tells us there must be some connection beyond a mere correlation of gas prices and solar woes.

I think this is just the start of the disruptions caused by low gas prices. On a very small scale our company is affected in contract renewals and the prospects of lower electric prices/subsidies for new project development. Many other businesses will be forced to adapt and potentially sooner then anyone expects.

Source: Shale Gas Is Starting To Affect The Markets