America's current recession is the worst since the 1930s and "the most synchronized" with failing markets worldwide, Standard & Poor's (S&P) David Wyss, chief economist, told reporters Monday. Unfortunately for natural gas producers, it also coincides with the blossoming of the nation's unconventional gas resource base.
"Gas prices have plummeted from around $14 last summer to about $4 today," noted S&P analyst David Lundberg. "Why? The poor economy first and foremost...Industrial demand, which constitutes about a third of overall gas consumption in the U.S., is down about 13% year-over-year. But also in the natural gas sector...supply was up about 7% in 2008 relative to 2007, and this is really because the industry has finally been able to unlock a lot of these more challenging unconventional natural gas resource plays. The industry has done well in that regard but unfortunately the timing has been rather poor."
Most exploration and production companies can't make money with today's prices, Lundberg said. Borrowing bases have been cut and some borrowers are in violation of covenants. "Cash flows are falling substantially," he said.
For those seeking comfort, the futures curve is a tempting place to look, but it offers no promises, Lundberg said. While spot prices are around $4, the Nymex futures curve is in strong contango, with $6 and $7 available further out. "Is this a good thing? Maybe, but it's worthwhile to bear in mind that the futures market has historically not been a good predictor of future spot prices really at all," Lundberg said. "In our view the key determinant as to whether or not actual spot prices will be above or below the futures curve really relates to a few factors."
These are the timing of the economy's recovery, cost reductions among producers and service companies, production declines spurred by the nation's falling gas-directed drilling rig count, as well as imports of liquefied natural gas (LNG), which are running about double last year's levels at about 2 Bcf/d.
"Is there any good news? Really not much," Lundberg said. However, producer costs are falling, he said, and Wyss said the economy could turn a corner by the end of this year.
Although "the economic outlook right now still looks pretty bad," the bottom could be reached late this summer or early fall, said Wyss. However, that expectation would be squashed by another failure in the financial sector, he said.
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