Gas Price Collapse Leading to 'Armageddon Quarter' for Producers
The gas market showed last week it was fed up with low crude oil
prices getting all the attention. In a market swing that was
nothing short of unbelievable, gas prices collapsed to near
historic lows for a week in December. Spot prices at the Henry Hub
plummeted to $1.01/MMBtu on Friday and averaged $1.32 for the week,
down 64 cents from the week prior. Spot prices at a number of other
locations in Louisiana and Texas fell below $1 on Friday.
Most of the nation sweated through Christmas shopping trips last
week as temperatures reached record highs in at least 30 major
cities. Meanwhile, gas suppliers struggled to find places to put
their gas. Storage levels already are at record highs for this time
of year, according to the American Gas Association, and are 471 Bcf
higher than they were at the same time last year. AGA reported a
net 8 Bcf injection last week for the week ending Nov. 27, and
there's a strong likelihood it will report another injection this
With prices so low and storage so high, there was a strong
incentive last week to "hide gas" by socking it away amid
pipelines' linepack. As a result, linepack reached critical levels
and at least six interstates were forced to issue operational flow
"Gas prices have plummeted, and there is no place to store gas,
no place to arbitrage gas and as a consequence we have the end of
civilization as we know it," quipped John Olson an energy analyst
for Sanders, Morris and Mundy. On a more serious note, Olson said
this will be an "Armageddon quarter" for producers because of warm
weather, overloaded storage, $11 crude prices and SEC mandates to
revalue reserves, not to mention commercial bankers demanding more
collateral or asset sales. "This is bad news. This is also
reflected in the fact that oil well drilling is down 47% this year
and gas well drilling is running 20% lower than last year because
nobody has any money," said Olson. "Producers didn't even replace
their production last year. They're not going to come close to
doing it this year.
"The consequences are that we are going to bring on the recovery
sooner rather than later. The faster we go down, the better off
we'll look," he said.
"But there are a lot of producers right now in intensive care. A
lot of people are struggling. .I think we are in for a shake-out of
some major dimension. The small undercapitalized producer is indeed
Donato Eassey of Merrill Lynch said he would expect the marginal
E&P players to "just implode and sell themselves to the highest
bidder they can get." He sees "potential bankruptcies and the whole
bit in the January-February timeframe" if gas prices don't improve
soon. "You've got to have weather show up or it's going to be
'Katie, bar the door.'"
While the pure E&P companies are getting hit hard, however,
this could be a "home-run opportunity" for companies like National
Fuel Gas, Questar, Coastal and Columbia Gas, said Eassey. They are
both utilities and E&P players and generally have high credit
ratings so banks are "flocking to them like crazy," he said.
The major winners will be the "energy conglomerates, which used
to be called the pipelines," Olson agreed. "These people have
tremendous surplus cash flow, good pipeline profitability through
thick and thin, high-quality earnings and a necessity to grow by
acquisitions. They are in the driver's seat [of the production
cycle] because they're the people that have all the money that can
bail out the producers on favorable terms. They can get a call on
gas and control the flow of the supply, and that's the name of the
game." Both Olson and Eassey agreed the diversified energy
companies are likely to jump in soon and start buying up
significant properties and smaller E&P companies.
If crude prices persist at subterranean levels and gas prices
don't recover in the next 30 days, Olson said, the "shake-out" will
begin to develop. "You will see mergers to enhance business
profiles, like Seagull and Ocean Energy, or mergers of necessity of
smaller guys or outright cash sales. I would have to say a
[significant number of them]."
PaineWebber analyst Ron Barone noted that compounding the
problem this quarter is the comparison with the fourth quarter of
last year, which was colder than normal. But he's optimistic
weather will change soon, possibly as soon as this week, and gas
prices will recover quickly.
"Personally I don't think this is going to last very long for
two reasons: first it is supposed to get colder next week according
to the National Weather Service and the Weather Channel, still
above normal, but much colder than now with daytime highs [in New
York City] near 50 as opposed to the 70 degrees that it is now. The
other reason is if prices stay this low, producers are going to
start to shut in. If they get to $1.60, producers start to run
their economics, and it's well below $1.60 now. Some discretionary
production will be withheld from the market if prices stay this low
for an extended period of time." Barone predicted shut-ins will
start to occur if prices stay in the low $1s/MMBtu for two weeks,
which he thinks is unlikely because of colder weather approaching.
However, several Louisiana producers confirmed last week they
already started curtailing production.
Curt Launer of Donaldson Lufkin and Jenrette Securities sees
little long-term impact from this gas price crash mainly because
few companies sell short-term spot gas anymore. "A lot of companies
have hedged production," he noted. "A lot of companies have sold
out in the bidweek period for the month of December, same thing for
January. So lets not overreact to the weekend spot market, which is
so far below the futures screen.
"You're talking about the weekend market right now. Somebody is
selling that gas just the same way that somebody paid $7,000 for a
megawatt hour in June. That's the equivalent volumes we're talking
about. It gets a tremendous amount of press and it really is
happening, I'm not denying it, but it's not the kind of thing that
will swing the annual average price or any particular company's
realized price by anything more than a loss in the rounding."
Launer failed to note, however, the power price spike in June,
significantly impacted the earnings of several companies, some of
which were forced to close down marketing operations and take huge
losses for the quarter.
A Coastal Corp. spokesman, however, supported Launer's first
point, noting that the company already has hedged all of its
production for December and has no plans, and sees no reason, to
consider production curtailment.