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Bill Francis
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I run a small oil and gas company and keep tabs on the student loan market.
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  • EIA Natural Gas Monthly states Consumption not Production on the rise.
    EIA’s monthly numbers came out today and I had a couple observations about what they meant for nat gas prices. The numbers, which show production and consumption figures up until February of this year, were the first to use the new methodology set forth by the EIA.  Well it turns out the generic overpaid under worked beaurocrats in Washington had been basing their predictions on 7 year old data rather than just the past 18 months and as such had over estimated our production by 0.5bcf/d.  That's over 180 bcf that we were hearing was flooding the market that just wasn't there. 

    Let’s first look at the YOY production data that came out for Feb.  Dry gas production for Feb. 2010 was 1,640 bcf, and for Feb. 2009 it was 1,636 bcf. Hardly a huge increase in supply like people would have you believe. While production numbers seemed to have stayed the same YOY, the consumption numbers are telling a completely different story. Consumption in Feb. 2010 came in at 2,512 bcf. This wasn't nearly as much as Jan. 2010’s record of 2,838 bcf but it blew last year’s February numbers out of the water. In 2009 we only consumed 2,309 bcf. So we burned up 203 bcf more this year or almost a 9% increase.  While overall production seems to have stagnated YOY, our demand has seemed to be out pacing it quite steadily in the short term. In fact the past three months have seen an average increase in year over year monthly consumption of 145 bcf, while the same stat for production is a little over 1bcf.  I see these numbers and get confused on how any pundit can go out and say there is so much extra production, when they don’t reference how much more extra consumption there is.
    What seemed to keep prices low by picking up the spread between the production and consumption numbers were the record storage levels that were at play and the doubling of our imports of LNG in 2010 over 2009 levels. Storage withdrawals were up 362 bcf YTD from 2009, and net imports were up 62 bcf for the same time periods. I wouldn’t put much weight into the US getting dumped with a ton more LNG this summer though bc they were clearly just arbitraging spot prices between the UK when prices got into the high 5’s in January and February.
    In February industrial consumption was up 11% from the year before, but still below pre financial crisis levels in Feb. 2008 by 6%. So there’s still some recovery to be had, especially with companies like Dow Chemical dominating their quarterly earnings yesterday on higher demand for commodity plastics and higher industrial demand from the US and Europe.
    I cannot stress the importance of Electrical demand enough. Maybe not on a month to month basis, but power plants consuming natural gas should be destroying the numbers put up by their predecessor from the year before for a long time. Even more certain is that this year’s Electrical power sector will consume more natural gas than any year before it. The low $4 price range only solidifies this bc the cheaper it gets the more incentive a utility has to switch to the cleaner and easier to use natural gas (see my last article). YTD the electrical sector has already consumed a little under 9% more nat gas than last year.
    Residential and Commercial will usually follow each other in consumption trends as they did this go around. Both were up around 10% YOY for February. One argument someone might throw out there to counter all these claims that consumption is moving higher was that this winter was extremely cold. I made note of that argument and discounted it last month as I will this month.  Feb. 2010 had 1% less heating days (days which require people to burn gas) than 2009 and the 40 year average according to NOAA.  So don’t try bringing me down with that.
    Prices took a big hit today bc of a higher than expected inventory injection, but more importantly I think some traders were looking for any reason to see prices move higher as an indication that the changed methodology had really affected what was going on in the fundamentals. When the 0.5 bcf/d number came out it wasn't quite the big number they were hoping for, and they dumped it to the $4 floor which seemed to hold up pretty steady. I would recommend picking up futures of any month that dips under $4 especially with that hurricane season only months away. 

    Another point to ponder is that contango is back in the mix after futures fought through 4 months of an inverse carry trade. The May contract is the first contract in 2010 to be priced higher than the previous month’s price at expiration.

    Disclosure: no positions
    Apr 29 7:57 PM | Link | 1 Comment
  • A step away from coal is a step in the right direction....
    Almost every article you would read over the past year on Bloomberg in reference to natural gas prices would refer to how industrial demand has fallen off.  Yet, it was rare to see a reporter mention how the electricity producers had continued to up their consumption of natural gas.  The following are a couple of trends that I've been seeing in the Electrical Power sector that I think show a very interesting move by utilities away from their old bread and butter, coal.

    On Monday, the Governor of Colorado signed into law HB 1365 or the Clean Air-Clean Jobs Act.  This is a clear victory for natural gas advocates and a harsh blow to the powerful coal lobby. The bill states that coal fired power plants will have to be retired or retrofitted to dramatically reduce the amount of nitrogen oxide and sulfur dioxide and other emissions deemed to be GHG’s by the EPA. What this means is that utilities such as Xcel will have to start the process of figuring out whether it is more financially viable to retrofit its current plants into less harmful coal consumers (which is expensive) or to convert them into natural gas fired turbines (which are more efficient). The natural gas route emits ½ as much GHG’s and there is already a lot of unused natural gas power capacity that could easily be fired up(see below). The largest concern for the utilities has to be how big of a premium they will pay for their natural gas supplies over coal. Coal has historically been a far cheaper commodity per btu, but with the recent drop in nat gas prices and the fact that state and federal governments will start mandating expensive coal plant overhauls has leveled the spread in prices.  Colorado is the first state to pass any sort of energy legislation of this kind.  Other states are surely taken notice as Colorado was one of the first states to pass a law requiring a renewable portfolio standard.  Now over half of the states in the union have some form of RPS on their books.

    On the same lines of pitting Coal against Natural Gas, a recent report by PFC Energy, a consultant firm, claims that America already has the capacity to switch over to strictly Natural Gas as a base load fuel.  Historically, the US Electrical sector uses most of its Nat Gas capacity to fill peak electricity demand.  The two reasons for this is that natural gas can be fired up and producing electricity in a fraction of the time coal can, and it is only used when the price of electricity justifies using the higher cost fuel. This peak electricity demand usually occurs for a few hours in the middle of the day when temperatures are the hottest, and everyone is awake and using electricity.  With depressed prices, gas is now viable as a base load generator in certain areas at all times of the day.  The report states the current utilization rate of Nat Gas plants is around 25%, while coal is around 70-75%.  So you have all this capacity that is capable of producing electricity from natural gas that is just not turned on. Meanwhile, the coal plant down the road is humming all day long and emitting twice as much GHG's.  The main thesis of the PFC report is that if we completely retire all of our coal capacity we could switch to strictly natural gas power plants and still only have them running at 72% utilization.  Of course this would take a decade or two to accomplish, but the people deciding where to put their capital at the large utilities seem to have realized this shift away from coal.  According to the FERC "State of the Markets" over 2009 there was 25,000 MW of capacity that came online via new power plants being built or expanded.  50% of that was new Natural Gas capacity while only 12% was dedicated to burning coal.  This discrepancy was largely due to the Utility sector scrapping plans for 26 coal fired generators in 2009 according to Sustainable Business magazine.  Wind for the most part took up the remaining capacity which is another story in itself.

    Another piece that I want to look at is a stat that I came across when looking at the overall production of coal and natural gas for the past couple of decades.  In 2009 Natural Gas production overtook coal on a btu basis for the first time ever!  This means for the first time our country is producing more energy from natural gas than from coal.  Where is all this energy going? Well according to the FERC state of the Industry report, all of this cheap gas has been stealing the market share away from the coal plants and reducing the price of wholesale electricity by 50%!  That's coming from a government agency who's president won't even mention natural gas in a speech.

    The data is also pointing to gas wanting to break out as a preferred fuel to coal regardless of the pricing environment.  Since Natural Gas has become deregulated there have only been two years where the electrical sector has used less natural gas than before.  Yet nat gas prices have risen 9 out of the last 13 years.  Whoever thinks power plants will only use more gas at lower prices is WRONG.  One of the reasons they are firing this stuff up so much faster than coal is just that, they can fire up a natural gas power plant that much faster than coal.  Building only takes about 18 months as opposed to several years, and turning on the turbines takes a fraction of time and energy as opposed to coal.  The second being that natural gas fired turbines are more efficient than coal on a btu basis.  So if coal and natural gas prices were the same, a utility would clearly chose natural gas in order to produce more KW/hour per btu. Back to the big picture of the electrical sector continually using more gas year in and year out.  These are not just small increases in consumption.  In fact when the EIA started recording data in 1997 the sector was consuming 4 Tcf per year. 13 years later we are now consuming almost 7 Tcf of natural gas to produce power.

    With horizontal rigs, tailored to the larger shale wells, increasing steadily and showing no signs of slowing down I don’t see us having a problem getting enough gas to the generators. In this cheap nat gas price environment it can be assured that this new gas will get burned somewhere. And It’s becoming evident that with or without price swings in natural gas the way utilities have traditionally been producing their electricity through coal will be extremely different in another 10 years.

    Disclosure: no position
    Apr 22 8:12 PM | Link | Comment!
  • Three Decisions That Will Keep the Independent Producer Afloat
    If you’re a Public Independent Natural Gas producer in 2010 it seems as if you need to hop on the train and do three things to make sure you can keep that stock price up. The reoccurring theme for all of these appears to be the depressed price of Natural Gas and how most companies had not plugged $4 gas into their shale growth strategies. The first move CEO's are making is to divest their assets that will not supply the most of your growth over the coming years or divest in a way that will pay for some of your growth.  It is evident that the sell offs are following two trends. If it’s a non-core asset they are willing to part with 100% interest, yet if it involves a core asset (shale play) they seem to always find a major who is willing to buy into minority stake of a deal and post up front drilling costs.  Divestures for these companies are fortunately coming at a time that all majors are chomping at the bit for acquisitions into the bridge fuel of the future. The deals look to be a good fit for both since the majors are not leveraged to the teeth with debt coming due, and are willing to take the risk of $4 gas for the time being. Here are a couple of the big deals in the spotlight over the past months:
    Devon (NYSE:DVN) who has sold out of high cost deep water properties in the Gulf of Mexico, Brazil and some exotic international plays among others to Apache and BP,
    Range Resources (NYSE:RRC) has completed two deals in West Texas and Ohio for around 500 million
    Chesapeake Energy (NYSE:CHK) pretty much invented the Shale JV with deals covering all the major shale basins with three of the largest five integrated oil companies in Europe BP, Total, Statoil.
    Exco Resources (EXCO) sold off ½ it’s Hayneville action to BG.
    Anadarko (NYSE:APC) completed the first Asian Shale deal while getting in bed with a Japanese Conglomerate Mitsui and giving up a 1/3 of its stake in the Marcellus
    Atlas Energy (NYSEARCA:ALTS) went into a JV with Reliance Energy in the Marcellus for a 40% stake structured along the same lines as the APC and CHK deals
    Talisman (NYSE:TLM) had a two billion dollar deal to get rid of some Canadian natural gas fields in order to focus more on the US unconventional plays
    Petrohawk (NYSE:HK) sells off midstream and producing properties in northern Louisiana and some Oklahoma properties so they can really ramp up on the Eagle Ford and Haynesville.
    EOG Resources (NYSE:EOG) has publicly stated its intentions on Divesting non core natural gas properties during late 2010
    Penn Virginia (NYSE:PVA) recently closed on a deal to offload some Gulf Coast assets to focus on the Haynesville.
    As these companies struggle to realize that low gas prices are around to stay the second move they seem to be making takes them out of their comfort zone and into a more liquid environment.  Companies that have solely relied on natural gas over the past year have been getting picked on by their big brother, oil. One can’t see this more clearly than in the case of Encana (NYSE:ECA). When they announced their company’s split into a natural gas company and an oil company back in November one should have been able to easily predict what was going to happen.  Now 6 months later one is up 40% while the little brother has been knocked down 10%.  Meanwhile the S&P seems to be roaring and indicating the market is pro oil and not as bullish as once thought on natty gas. CHK has come out publicly and stated that they are looking to move their oil portfolio to 20% of the company’s reserves, up from 8%. Sand Ridge (NYSE:SD) who has close ties to CHK, being that it’s founder was also a founder in CHK just completed a deal with Arena to make sure they still had significant oil exposure. EOG has also publicly come out to claim it is exploiting new crude discoveries while shedding some natural gas properties. All of this can be explained by the Eagle Ford shale and how it is now at the center of the shale leasing bonanza. One would think a big reason behind this is the fact that companies are able to produce liquids as well as natural gas from their horizontal wells, as opposed to the Haynesville which is producing solely dry gas.
    The third and final move is even more across the board than the previous two. With prices so much lower than when these companies bought their leases the one clearest position to take is lower your costs and lower the supply of your product. Obviously the way to do this is to cut Capital Expenditures which is slang for don’t drill as many wells as you were planning on. I won’t even go into examples of this bc you can throw a dart at a wall of E&Pers and almost certainly hit one that’s lowered their Cap Ex recently. The reason is clear, as a whole the industry has realized they found too much of this stuff too quickly and they need to quit drilling themselves out of a job. 
    Here is the big catch 22 though, how do companies stop drilling and in turn raise nat gas prices so they can stay solvent, when all of their leases will run out if they don’t continue to drill creating a solvency problem. I believe the companies who have embraced the ideas from above have figured out an answer to this difficult question. They sell out to large companies that can give them cash and get hit with losses in the near future, bc the buyers are sheltered by high oil prices. Then the indy’s pick up some oil for themselves with some of the newfound cash and free drilling given to them by their new partners.  The third part of the puzzle and the one that should make or break these companies is to cut their Cap Ex/drilling in order to reduce supply and drive up prices in the short term.  By doing this prices should surge to $7-8. They’ll be able to draw upon the cash they got from the integrated companies and leverage their oil properties to ramp up their drilling schedule 2-3 years down the line to retain all of the acreage that’s just about to expire. 
    These companies all leveraged their future on buying up massive amounts of land with borrowed cash in hopes of easy money at $8 dollar gas. Now that that fantasy is gone they implemented this complex but smart strategy to still make money for their shareholders.

    Disclosure: Long CHK
    Apr 13 11:39 PM | Link | Comment!
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