While Natural Gas Production Increases, Company Stock Prices May Not

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Includes: CHK, EOG, XTO
by: David Enke

As a result of high prices, new reserve finds, and better technology, natural gas production in the US is up 8% this year, with growth expected to continue as new wells come on-line in Texas, Oklahoma, and Louisiana, and new reserves are scheduled to be taped in Appalachia and Canada (see WSJ article).

Unfortunately for the natural gas companies, demand is not growing as fast, up only 5.5% - the Pickens Plan notwithstanding. US LGN imports have already been down given the higher prices paid in Asia and Europe which have caused shipments to be diverted (see previous post). As long as production in the US stays high, with reduced avenues for exports and steady demand at home, prices will be pressured to fall. Then again, we may be getting near a tipping point as prices approach $8 per million BTU, a point that analysts believe producers will cut production, with the tighter supply driving prices back up in a form of a self-correcting mechanism.

Even with short-term corrections, longer-term price pressure will most likely come from new discoveries of shale, the dense rock formations that have been known to hold natural gas, but for which production had been impractical due to the rock not being porous enough for gas flow. However, technology came to the rescue in the form of using pressurized water to crack the shale and release the gas. The technique is working in the Barnett Shale in Texas and can be used in the Haynesville Shale in Louisiana and Texas, as well as the Marcellus Shale in Appalachia.

Altogether, US shale could hold as much as 840 trillion cubic feet of natural gas. Astonishingly, this estimate is equivalent to 140 billion barrels of oil, or more than half the proven reserves of Saudi Arabia. While none of this natural gas will be coming on-line overnight, it certainly seems promising for helping supply some of the clean energy needs of the US going forward.

Unfortunately, unless the natural gas companies, T. Boone Pickens, and others can convince Congress of this benefit, it may be a while before demand catches up to production. As a result, Chesapeake Energy (NYSE:CHK), XTO Energy (XTO), and EOG Resouces (NYSE:EOG) may have to wait for real price appreciation, or to see the benefits of the massive investments each has been making to tap into the shale reserves.

Disclosure: None

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