Larry Bellehumeur

Natural Gas: Grim Outlook Through Late 2010

Wow, mn33....I'm glad you actually read my answer before making such a comment! =)

The reality is that it depends on what your timelines are. If you are a short term trader, it proved wise not to get involved in any NG-related activities. However, NG is the fuel of the next 10 years, and this would prove to be a good long-term entry point if you were patient.

But, I guess you didn't bother to read that far!

Natural Gas: Grim Outlook Through Late 2010

Wiskey,

To add to my points above, I'm not saying that Natural Gas is dead forever. Everyone believes that prices will rebound. It is a matter of opinion when one thinks that they will, not a matter of fact. NOONE knows for sure. Not even Execs at EOG.

EOG may believe that Natural Gas is going to rebound like they do, that is their belief. Most analysts, as you know, since you follow it as close as you do, do not believe what EOG is saying. As well, since you also know the business as well as you do, you'll know that Service companies are not as booked up for the Winter drilling season as they would be, if the overall market was of the same belief as EOG. Many of my customers are Oil/Gas Services companies, and they have been told by the Producers to expect a lighter than normal drilling season, which for Canada, means a drop from over 25000 new wells that they saw in 2006/07, down to a lower 12-15K in the Winter 2009/10 drilling season. It is also light for Summer 2010 bookings.....Where is this bullishness?

I'm trying to see where you are coming from, but the market simply doesn't seem to think this is true. Natural Gas futures for February 2010 are only trading in the $5.50 range. If the belief was as obvious as you say, where are the hedge funds? They live for this stuff.....

The likelihood is that EOG didn't think that Natural Gas rates would be too low in the first half of 2010 when they put the hedges in place (a long time ago, I presume).....they are not alone, most companies didn't. When they bought the hedges, Natural Gas was on its way to $13 and beyond. EnCana, which is the example that I used, is probably the premier run Producer in North America, and even they didn't hedge to the extent that they needed...

Now, I'd love to be wrong, I'd love it if you were right. I make a lot of my living selling equipment to Natural Gas drillers. Unfortunately, it is that insight into the market that I get from talking to them daily that further exemplifies my belief that we will not see a big rebound as fast as you predict.

Just look at the EIA inventory. Based on the current pace, we may top out at close to 4 TCF by the time we start drawing from Inventory in November 2009. In order for inventory to hit its normal range by April 2010 (just normal, not low), we would have to draw about 2.6. Considering that the average draw in the past 5 years has been about 1.8 to 2, it would have be a pretty nasty cold winter, combined with a spike in demand / disruption in supply to have a chance. To see that happen by January 2010, we would have to be down to about 2.2 TCF, a draw of 1.8 TCF in two months! The average draw down from 04 to 08 is half of that....Impossible? No, but would you want to bank on that?

Again, I'd love to be wrong. I'd love to see us with $9 Nat Gas in December, at which time I'll gladly write a glowing retraction. It would just take an awful lot of things beyond the Industry's control for this to happen. Producers are doing what they can, as EnCana, CP Canada and Suncor/Petro-Canada, along with a few US ones have announced production cut backs.

I appreciate your attempt to educate me. Please do remember that I live in Calgary (where we live and breathe Nat Gas), and have a lot of access to key people in the Industry.....all of which who would love to see EOG's scenario develop. They just don't believe it (re: see production cuts above)

Cheers....keep up the comments, I love having debates, it is what makes this fun. I don't get any money for this, but rather, it is something I do in my spare time.

Natural Gas: Grim Outlook Through Late 2010

That should read "....would not just stop" on the third line

Natural Gas: Grim Outlook Through Late 2010

Wiskey -- thanks for your note. Your assumption is that production will stop completely, and everyone will just burn through all of the inventory. If that were the case, you have a point. Since production just not just stop, do you really think we will burn through our excess capacity in that little of time?

If I accurate knew the exact answer as to how long it will take to bring supply down to a more normalized levels, I'd be much richer than most people. The reality is that Natural Gas is very much linked to weather, and unless we have a very hot August/September, then a really cold start to fall and winter, this inventory is not going to be burned off anytime soon.

You're entitled to your opinion, but it should be noted that your comment on how fast we can burn through inventory isn't accurate. The world's energy producers aren't going to seize production, just not bring on new production....

Zorro -- the reality is that most producers that I follow would not have hedged more than 30-40% of their production that far out, when prices were good. My point was more a long the lines that most producers who have hedged are likely to see a significant drop in revenue as those hedges come off....your point is well taken, but I would expect that it is more the exception than the rule to see hedges of really high values (say north of $6) and high percentages (say north of 50% production) for too far into 2010

Natural Gas: Grim Outlook Through Late 2010

Ok, a lot to digest here....here goes some comments:

Naturallight - That is scary. My point was more that Shale Gas (which is deemed the saviour to the US Foreign energy crisis) declines fast. I don't have as much knowledge of Off-shore, but if you are right, that is crazy.

Mmark - In the article, I talk about someone at a drilling company. He did mention that he had seen them that high, but 50% was more the norm. Either number is scary, considering the lack of production.

Barbarous - My source was the US Natural Gas Inventories report for August 13th (by EIS). It shows that storage from Producing wells climbed up to 1073 Bcf, which compares to the 5 year historical comparison (2004-2008) of 794 Bcf. Maybe the actual production isn't up, but the storage produced from producing wells is up. I probably should have worded it different.

Buck East - depends on what your cost per well is. Some of the deep wells aren't economical as less than $6. Other formations are much less complex to drill. Baker's rig count may be up compared to other months, but the more accurate comparison is to compare it YoY..

Natural Gas: Grim Outlook Through Late 2010

Tipalia - Thanks as always for your kind words. I've written before on Natural Gas, but never really focusing heavily on the Income Trust side. I'm also a Canadian, but never really cared too much about the US dollar exposure (as you're getting that exposure anyways with the NG price being in US dollars, and many Canadian Producers looking at declaring their earnings in US dollars (like EnCana).

In terms of the Trusts in particular, I like ones that are relatively well split between Oil/Gas, or ones that are more focused on Oil at this stage. Ones like Crescent Point (no position) and Bonavista (no position) are two of my favourite, as they give both nice exposure to the Bakken Oil Play, as well in the case of Bonavista, some nice exposure to the Montney play in NE BC / NW Alberta, for when the Gas price does rebound.

Specifically for Canada, I would look at some of the drillers, but only when you believe that Nat Gas has really turned for the upside. Look at ones such as Trican, Ensign and CalFrac (no position in any).

Ferdinand -- It does sound really high. This is the approximate number that I was given by a Supervisor of Drilling at one of the major drilling companies. I have read higher....

Here is a clip from an article from Ross Smith Energy:

Total U.S. production had remained relatively flat year-over-year prior to a recent increase in gas drilling activity in 2007 that
continued through most of 2008. According to the analysis, the average annual first-year decline rate for new shale gas wells was
relatively unchanged, between 40% and 50%
.
The base decline rate of U.S. production had remained fairly steady at 26% to 28% since 2003. “The decline, which needed to
be fought, during 2007 (declines from 2006 and prior drilling) was around 27%.”

Natural Gas: Short Term Bear, Long Term Bull

Hello Blizzard....

Some of the Industrial Companies (such as in the production of Steel, or in the production of Steam for the Oil Sands) often have the ability to change the input fuel source that they use. I couldn't answer how fast they could change exactly, although it wouldn't be that long. It would require some slight overhaul.

The reality is that Nat Gas is still the preferred method for these types of programs long-term (as it has less Carbon Footprint), so there is a gradual change to this anyways..

Hope this helps....I write a lot of articles on Energy, so hope to see you on future postings....

Larry

Natural Gas: Short Term Bear, Long Term Bull

Think I need more coffee....my comment to Mad Hedge should read "I doubt that it IS sustainable for too long"

Natural Gas: Short Term Bear, Long Term Bull

As always, thanks to everyone for taking the time to read my article.

Mad Hedge -- I suspect that it may bottom out closer to $3.00 before we are done. Some renewed Economic optimism may help to raise it temporarily, but doubt that it sustainable for too long. I do like Devon Energy as well, mainly because they seem to be a very well run company. Disclosure - No position in DVN

Fitz -- As I mentioned, I am not sure if we will ever see a boom in Nat Gas usage for vehicles. Proponents of it include Boone Pickens, who has done some advising for Obama, but it would be too much to create the necessary infrastructure to match the ease of using Oil. A possible spin-off for Nat Gas would be if the move was towards Plug-in Hybrids took hold, as they would create a greater need for Electricity production. This would have some indirect effect on increasing Nat Gas use.

LongOil -- There are many people who are much smarter than I when it comes to Chemistry, so I will take your word for it. The reality is that it will be at least 2018-2020 for any power to be generated by Nuclear in the Oil Sands (and this is assuming that all of the Government regulations can be done quickly....no sure thing).

Cheers
Larry

Four Long-Term Winners Selling at Deep Discounts

231796, I did notice that I was a bit light, as I was referring more to their recent P/E ratio. Your numbers only make my case sounds better, so I'll stick with yours! One concern for MMM seems to be their perceived over-exposure to the thin LCD coating (don't know the correct term, I apologize) market. However, most people have either bought one of these, or with the sunset of Analog Service, many will move towards LCD style TVs. I think this is a stable business, so i am not sure what everyone is so afraid of (likely the same reason for the downfall in Corning as of late)

Thanks for your post...
Larry

Four Long-Term Winners Selling at Deep Discounts

231796, I did notice that I was a bit light, as I was referring more to their recent P/E ratio. Your numbers only make my case sounds better, so I'll stick with yours! One concern for MMM seems to be their perceived over-exposure to the thin LCD coating (don't know the correct term, I apologize) market. However, most people have either bought one of these, or with the sunset of Analog Service, many will move towards LCD style TVs. I think this is a stable business, so i am not sure what everyone is so afraid of (likely the same reason for the downfall in Corning as of late)

Thanks for your post...
Larry

Four Long-Term Winners Selling at Deep Discounts

Thanks everyone for your great comments...

User 138602, I know EnCana quite well actually (they are one of my largest customers, as I sell communications equipment to them). I like them at this price, but suspect that they will fall another 10% or so during the "shoulder" season (time between the heat of the summer and the cold of the winter). They are much more Natural Gas focused, so they tend to trade a bit with that commodity. Their recent venture into Refining, and their Oil Sands efforts have them minutely affected by the cost of Crude. I would recommend picking them up before they split into two separate companies (Oil / Refining and Natural Gas).

They are extremely prudent, and should be very shareholder friendly in the future. I suspect that you won't see booming results any time soon, though, San Fran. An alternate play in the CDN Large cap Oil and Gas space would be Canadian Natural Resources (CNQ). They are about to launch their Oil Sands efforts later in 2008.....They are also a large customer of mine. As for CNR (Railroad), they are very exposed to "North and South" trade. This means that their main shipments are from Canada to destinations in the US. In a way, you can think of them as a proxy for the US Economy, as they tend to ship items like Auto parts and Retail sales to the US. If you are looking for more exposure to Commodities (such as Grain, Potash and Coal), you might want to look at CP Rail (CPR) trading in Toronto, as it is more of an "East-West" play (they ship a lot of items to China/India). As for TransCanada, they are a good play, but not a huge growth play. Great for yield, and they may have among the most steady earnings on the planet, as most of their revenue is regulated.

Disclosure -- Long on TRP, None on CNR, CNQ or CP.

As for GE, it definitely is a bit of a contrarian play at this stage, Humble, that is for sure. However, I'm thinking that the Financial part of their company will right the ship soon enough, and in the meantime, their Industrial sector should keep them moving....

Love the comments, everyone....

Larry

Four Long-Term Winners Selling at Deep Discounts

Thanks for your comments...

Owen -- I do agree that THI's traditional PE might be somewhat difficult to maintain. However, its strong franchise, strong defensiveness and strong margins do deserve to be valued more than most, even if its growth rate is not "market-shattering". It differs from our friends at Starbucks in two important ways. Tim's tends to be "less trendy" and tends to get more Blue-collar workers in its base. They tend to be more consistent in their buying, even in bad times. As well, while their coffee is not dirt cheap, their offering tends to be a lot less than the $5 Mocha lattes from Starbucks, making it less of a discretionary buy.

One negative is also their relative newness to the market, having been spun out of Wendy's, so you don't get the long-term horizons to look back on.

Michael -- sometimes the market does really give you gifts, as long as you are patient. Really tough to lose money in the market when you buy good companies at good prices, and show value. Thanks for reading!