Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Pauliene,
I would not use such an extrapolation without weather normalization. I agree that the balance this year looks relatively much better, but predicting storage level at the end of the season may be a little tricky.
There is a very vocal graph in it regarding the volatility characteristics of nat gas that have been changing. I would argue, there is an important fundamental reason why this has been the case: supply is more deliverable than ever and cost is more or less predictable. So $6 may really be a Black Swan event (i.e., what is its probability?)
SandRidge Energy: Activists Win, Why Is The Stock Down? [View article]
Robbieboggie,
Stronger NG price certainly helps. Please keep in mind the effect of the hedging. One of SD's issues is credit, and therefore cash flow. Cash flow may not be impacted as much as the move in the NG price might suggest.
I just posted a note on the shape of the futures curve - it is the front end that is most hedged that has moved the most.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Gigem,
Thank you for the links, will study (I always find your references and updates, and insights of course, very, very helpful - thank you).
The problem with liquids-rich backlogs, they depend on the infrastructure timeline. The Marcellus is a biggie. From what I see, there will be an acceleration into the second half of the year.
With regard to rig counts, there certainly was a step up in Q3-Q4 2012, but I do not see a continued ramp up (look forward to reading the article you recommended). There is also the issue of the lead time due to pad drilling.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
J_Smiley,
Great points, but as I said in my comment above, you may be underestimating three factors: hedging is a very effective tool for high-decline production; capital comes in from outside in billions; and no operator has a monopoly on highly productive acreage (it's a prisoner's dilemma - they will end up drilling to the lowest acceptable return). Agree on the point that high cyclicality of the business translates into higher required returns.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Where's gas going?
Great question. One number is better than a thousand words. It would be interesting to hear everyone's opinion. First we need to agree what is "gas." I suggest July 2013 Nymex contract and a 30-day forecast (let's use just one number, not a range). I see $4.479/MMBtu settle as of last Friday (April 19).
I would guess $4.50 (the way I get there, I guess within a month the market will be willing to give a $4.75-$5.00 price incentive to operators on winter peak pricing, and contango is only minimal as storage may not be full). Welcome everyone's view.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Ipttorff,
I agree, petchem demand that you are talking about is important and positive.
I would respectfully disagree on the transportation fuel impact - too tiny in terms of annual increases, can easily be accommodated by supply, not a big price defining factor.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Michael,
Just a thought: nat gas price is not driven by the week-to-week weather. If we have a massive anomaly like winter 2011/2012, or like summer 2012, the impact is, obviously, significant. But I would look at the structure first. And the next "constraint" is storage situation at the end of the injection season. The market is telling us that there is not constraint and the sky is very clear. Why should nat gas crash? Is the market wrong? What is it missing?
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
ChrisJArsenault,
I agree with Gigem, a draw is almost impossible, but the storage "balance sheet" may look a bit more bullish on a historical comparison basis than last week.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Dnpvd51,
I think about it from a different angle. Imagine an operator has a gas property that generates 40% IRR at a project level and an oil property that generates 60% IRR at a project level. What is the proper course of action for the company?
What you are implicitly suggesting, the company will direct all its capital to the oil property. I would argue, the mechanics are very different. The company will direct all its capital to the oil property plus borrow or raise, through some sort of debt/equity formula, as much capital as necessary to optimize the development of the higher-return oil property. In parallel, the company would raise capital to optimize development of the gas property: it is better to sacrifice some of the 40% IRR than sit on a negative carry for decades. Hence JVs and asset sales to capital-long, opportunity short buyers.
If IRR is 15%-20% (i.e., $4 gas, for illustration), there is not much to offer to a capital provider. If IRR is 40% (i.e., $5 gas, for illustration), there is a lot to divide up with a provider of external capital.
In brief, your assumption would be correct if capital did not flow.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Marketquant and ComputerBlue,
Ultra in the Marcellus is not a perfect example as the majority of their leases are non-operated. The lower cost wells are for UPL's acreage operated by Anadarko in the Clinton-Lycoming area. The higher costs relate to the Royal Dutch Shell operation in Potter-Tioga. There is terrific comment on my other article that may give an idea why Shell's wells may be more expensive:
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
User 10738391,
I just wrote a comment that go so long that I now feel it is worth a separate article which I will try to post soon. In brief, the lower power burn this year that EIA is forecasting is not irrelevant but is already reflected, to some degree, in the healthy supply/demand balance we are seeing. It's already "in the price," IMO.
Mississippian Lime: Encana Narrows Focus To Just 82k Acres In Osage, Extension Area Acreage 'Did Not Meet Expectations' [View article]
Aricool,
That's the thing, they are not putting much capital in Miss Lime. Another half a dozen to a dozen wells - and even that is conditional on positive production results from already completed wells are - is perhaps ~$40 million in capex in 2013 (if that). However, if their 80,000 acres prove productive, it may be enough to support five+ years of development drilling with three-four rigs - meaningful (or can be monetized once de-risked).
The bigger issue, they are not putting much money into Miss Lime. Not excited nearly as much as the sell side has been?
Marcellus And Utica: Will 2013 Deliver A Major Breakthrough In The Plays' Northern Extension? [View article]
Aricool,
I think 60-80 rigs is a toll order for the next few (or even several) years. Wet gas is the dominant product and has the highest requirements for infrastructure (well above dry gas and oil). So the ramp up will be gradual. Operators will not be able to commit to much more midstream (they ultimately pay for the build out) until they see more production history from more wells. Assuming everything goes well, new capacity will be contracted with time. But lead times are significant. So it is going to be a continuous "supply push." This year there are many wells waiting to be placed in-line once the first wave of processing and gathering infrastructure is in service.
Natural Gas Prices Rise From Historic Lows: Time To Buy Producer Stocks? [View article]
Stephan,
Great article. Just few things I am trying to figure out. What's Chevron's exposure to the US gas price? I thought they were predominantly oily and very international. Isn't US nat gas still a rounding error to their valuation? The same, although to a lesser degree, is true about Conoco I believe - North Amer gas is just 26% of their 2013 volumes? On Cheniere - wouldn't they in fact be at risk if nat gas prices moved up substantially? They have some merchant capacity exposure at Sabine and still have to contract the entire Corpus Christi project - may become more challenging if gas prices rallied much further. Besides, I thought their entire business model was not to depend on nat gas price.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
I would not use such an extrapolation without weather normalization. I agree that the balance this year looks relatively much better, but predicting storage level at the end of the season may be a little tricky.
SandRidge Energy: Activists Win, Why Is The Stock Down? [View article]
I would again make a reference to my latest note on nat gas:
http://seekingalpha.co...
There is a very vocal graph in it regarding the volatility characteristics of nat gas that have been changing. I would argue, there is an important fundamental reason why this has been the case: supply is more deliverable than ever and cost is more or less predictable. So $6 may really be a Black Swan event (i.e., what is its probability?)
SandRidge Energy: Activists Win, Why Is The Stock Down? [View article]
Stronger NG price certainly helps. Please keep in mind the effect of the hedging. One of SD's issues is credit, and therefore cash flow. Cash flow may not be impacted as much as the move in the NG price might suggest.
I just posted a note on the shape of the futures curve - it is the front end that is most hedged that has moved the most.
http://seekingalpha.co...
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Thank you for the links, will study (I always find your references and updates, and insights of course, very, very helpful - thank you).
The problem with liquids-rich backlogs, they depend on the infrastructure timeline. The Marcellus is a biggie. From what I see, there will be an acceleration into the second half of the year.
With regard to rig counts, there certainly was a step up in Q3-Q4 2012, but I do not see a continued ramp up (look forward to reading the article you recommended). There is also the issue of the lead time due to pad drilling.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Great points, but as I said in my comment above, you may be underestimating three factors: hedging is a very effective tool for high-decline production; capital comes in from outside in billions; and no operator has a monopoly on highly productive acreage (it's a prisoner's dilemma - they will end up drilling to the lowest acceptable return). Agree on the point that high cyclicality of the business translates into higher required returns.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Great question. One number is better than a thousand words. It would be interesting to hear everyone's opinion. First we need to agree what is "gas." I suggest July 2013 Nymex contract and a 30-day forecast (let's use just one number, not a range). I see $4.479/MMBtu settle as of last Friday (April 19).
I would guess $4.50 (the way I get there, I guess within a month the market will be willing to give a $4.75-$5.00 price incentive to operators on winter peak pricing, and contango is only minimal as storage may not be full). Welcome everyone's view.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
I agree, petchem demand that you are talking about is important and positive.
I would respectfully disagree on the transportation fuel impact - too tiny in terms of annual increases, can easily be accommodated by supply, not a big price defining factor.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Just a thought: nat gas price is not driven by the week-to-week weather. If we have a massive anomaly like winter 2011/2012, or like summer 2012, the impact is, obviously, significant. But I would look at the structure first. And the next "constraint" is storage situation at the end of the injection season. The market is telling us that there is not constraint and the sky is very clear. Why should nat gas crash? Is the market wrong? What is it missing?
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
I agree with Gigem, a draw is almost impossible, but the storage "balance sheet" may look a bit more bullish on a historical comparison basis than last week.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
I think about it from a different angle. Imagine an operator has a gas property that generates 40% IRR at a project level and an oil property that generates 60% IRR at a project level. What is the proper course of action for the company?
What you are implicitly suggesting, the company will direct all its capital to the oil property. I would argue, the mechanics are very different. The company will direct all its capital to the oil property plus borrow or raise, through some sort of debt/equity formula, as much capital as necessary to optimize the development of the higher-return oil property. In parallel, the company would raise capital to optimize development of the gas property: it is better to sacrifice some of the 40% IRR than sit on a negative carry for decades. Hence JVs and asset sales to capital-long, opportunity short buyers.
If IRR is 15%-20% (i.e., $4 gas, for illustration), there is not much to offer to a capital provider. If IRR is 40% (i.e., $5 gas, for illustration), there is a lot to divide up with a provider of external capital.
In brief, your assumption would be correct if capital did not flow.
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
Ultra in the Marcellus is not a perfect example as the majority of their leases are non-operated. The lower cost wells are for UPL's acreage operated by Anadarko in the Clinton-Lycoming area. The higher costs relate to the Royal Dutch Shell operation in Potter-Tioga. There is terrific comment on my other article that may give an idea why Shell's wells may be more expensive:
http://seekingalpha.co...
Natural Gas: Last Month's Rally Review And Near-Term Outlook [View article]
I just wrote a comment that go so long that I now feel it is worth a separate article which I will try to post soon. In brief, the lower power burn this year that EIA is forecasting is not irrelevant but is already reflected, to some degree, in the healthy supply/demand balance we are seeing. It's already "in the price," IMO.
Mississippian Lime: Encana Narrows Focus To Just 82k Acres In Osage, Extension Area Acreage 'Did Not Meet Expectations' [View article]
That's the thing, they are not putting much capital in Miss Lime. Another half a dozen to a dozen wells - and even that is conditional on positive production results from already completed wells are - is perhaps ~$40 million in capex in 2013 (if that). However, if their 80,000 acres prove productive, it may be enough to support five+ years of development drilling with three-four rigs - meaningful (or can be monetized once de-risked).
The bigger issue, they are not putting much money into Miss Lime. Not excited nearly as much as the sell side has been?
Marcellus And Utica: Will 2013 Deliver A Major Breakthrough In The Plays' Northern Extension? [View article]
I think 60-80 rigs is a toll order for the next few (or even several) years. Wet gas is the dominant product and has the highest requirements for infrastructure (well above dry gas and oil). So the ramp up will be gradual. Operators will not be able to commit to much more midstream (they ultimately pay for the build out) until they see more production history from more wells. Assuming everything goes well, new capacity will be contracted with time. But lead times are significant. So it is going to be a continuous "supply push." This year there are many wells waiting to be placed in-line once the first wave of processing and gathering infrastructure is in service.
Natural Gas Prices Rise From Historic Lows: Time To Buy Producer Stocks? [View article]
Great article. Just few things I am trying to figure out. What's Chevron's exposure to the US gas price? I thought they were predominantly oily and very international. Isn't US nat gas still a rounding error to their valuation? The same, although to a lesser degree, is true about Conoco I believe - North Amer gas is just 26% of their 2013 volumes?
On Cheniere - wouldn't they in fact be at risk if nat gas prices moved up substantially? They have some merchant capacity exposure at Sabine and still have to contract the entire Corpus Christi project - may become more challenging if gas prices rallied much further. Besides, I thought their entire business model was not to depend on nat gas price.