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EOG's Papa Predicts Depressed Natural Gas Prices Until 2018

Retiring EOG Resources Inc. Executive Chairman Mark Papa, who for years has offered colorful, spot-on macro forecasts on North American natural gas and oil markets, said last week during his final conversation with analysts that gas prices likely will remain depressed until 2018. There's no optimism for ethane prices either.

Papa, 65, made the comments on Thursday during a conference call to discuss EOG's 3Q2013 performance. It was also Papa's last official act at the helm; he is retiring at the end of the year but will remain executive chairman of the board.

The former Enron Corp. executive in 1998 took over the underappreciated exploration and production (E&P) arm, Enron Oil & Gas Co., and led its public offering as EOG a year later trading at about $21.00/share (see Daily GPI, Aug. 17, 1999; Sept. 10, 1998). The stock was trading in the early afternoon on Monday above $171.00.

With Papa at the helm, EOG not only outlasted the parent, but today it is one of the largest and most efficient onshore producers in the United States. EOG has abundant gas resources, which for now it has shelved to build an oil/liquids arm focused on three plays: the Eagle Ford and Bakken shales and the Permian Basin.

The oil and gas icon, known as the most quotable, agile and successful long-term survivor in the business, didn't disappoint analysts regarding his take on North American gas prices, as well as the outlook for oil and liquids.

"Regarding North American gas prices, I suspect I have a reputation as the most bearish CEO or former CEO in the E&P business," Papa said. "And I am not going to change that reputation on my last earnings call.

"I believe that gas prices will stay depressed until the 2018 timeframe, so EOG will not be in any hurry to generate a lot of gas deliverability."

The basis differential in the Marcellus Shale, which has slammed some operators this year, "is likely just a harbinger of chronic Appalachian price dislocations that we will see over the next multiple years," Papa said.

Why won't prices be stronger before 2018?

"I believe in 2018 is when we will have the first significant impact of the of gas exports" as liquefied natural gas (LNG) "from these converted former LNG import terminals," Papa said. "I think that's when we will really have the first meaningful impact, and I think that may have some impact on prices, so that is kind of the that I see things."

The Houston E&P again plans "zero North American dry gas wells in 2014 because we see no light at the end of the gas oversupply tunnel until 2018."

EOG also expects "ethane prices to remain weak until 2018," Papa said. EOG's average U.S. oil price realization in 3Q2013 was $2.74 above West Texas Intermediate (WTI) and within 1 cent of guidance. "This premium over WTI has shrunk considerably compared to our first-half realization because WTI has increased relative to LLS [Louisiana Light Sweet oil].”

For oil, "absolute 2013 total U.S. oil growth will be less than 2012, and this trend will continue in subsequent years," he said. Through August, he noted, U.S. Energy Information Administration monthly data indicated this year's oil production "is on trend to increase 600,000b/d on an annualized basis compared to 1 million b/d in 2012.

"We continue to be pragmatically bullish regarding oil prices, partially because we don't expect any large international shale oil plays to impact global supply for at least five years."

EOG didn't add any gas hedges during the latest quarter, but for oil, it has hedged 123,000 b/d at $96.44 for the first six months of 2014. For the second half, it has 9,000 b/d hedged at $95.30/bbl. "We have a number of contracts outstanding that could be put to us at various terms" as well, Papa added.

Assuming oil and gas prices are similar to the current New York Mercantile Exchange prices, EOG "will likely ramp up its 2014 activity in the Eagle Ford and Bakken/Three Forks plays above 2013 levels," while in the Permian Basin, overall capital spending likely will be flat, "but the spend ratio will shift dramatically from this year's allocation of 65% in the Midland Basin, 35% in the Delaware, to 15% Midland Basin, 85% Delaware Basin next year."

CEO Bill Thomas said the quarterly results confirmed that "EOG's oil growth momentum is not diminishing. Our six-year compound annual growth rate is 38%, which is awesome when you consider this growth is 100% organic. Each of our three key plays has 12-plus years of currently defined inventory, so EOG is built for the long haul."

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