Natural Gas Stocks Still Have Steam

by: Larry MacDonald

Natural gas stocks have rallied strongly in recent months. It’s about time: watching my Encana Corp. shares flat line since purchasing them last summer was like waiting for Godot (see log on trades in the May 24, June 7, Sept 29, and Oct 16 posts of 2006).

I’m looking forward to more gains. In response to depressed natural gas prices, the number of rigs drilling in Canada has plummeted by more than half and now stands near pre-boom, 2002 levels. This reduction in production lays the groundwork for stronger gas prices down the road.

Furthermore, as Jim Letourneau notes, decline rates for gas wells have almost doubled over the last 10 years, i.e. wells are pumped dry in half the time as before. That means production falls off faster when gas prices fall (and curtails new rig set-ups); vice versa, production is slower to ramp up when gas prices rebound.

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