A plethora of natural gas shale deposits, persistently high rig counts, hedging and available debt capacity have stifled domestic natural gas prices for possibly three years, analysts at Tudor, Pickering, Holt & Co. (TPH) said last week. Tradition Energy analysts also blamed “the poor prospect of economic growth in the second half of the year” in revising down its gas price forecast.
TPH analysts said they “haven’t loved gas, [and] won’t love it for a good, long while.”
In the first half of this year the front-month New York Mercantile Exchange gas price averaged $4.70/Mcf, and based on what they’ve heard and on reports from exploration and production (E&P) companies, TPH slashed its gas price forecast for the last six months of this year to $4.50/Mcf, which is $2 lower than predicted in March (see NGI, March 15). It earlier had forecast 2010 prices to average $7.50.
The next two years look no better, said the TPH team. Gas prices for 2011-2012 were cut to $5.00/Mcf, down from an earlier forecast of $6.50. In 2013 and beyond, gas prices now are expected to average $6.00/Mcf, compared with an earlier forecast of $6.50.
“If E&Ps won’t stop drilling, the gas price won’t go up. Period,” analysts said. Based on recent quarterly earnings reports, a “few key points stand out,” they said.
“First, independents cannot shift capex [capital expenditures] quickly enough away from gas to liquids,” they wrote. “Gas production (in our coverage universe) is still expected to grow 10% year/year (y/y) in 2010 and 16% in 2011. Second, E&P companies have started locking in 2011 hedges between $5-5.50/Mcf, signaling a willingness to continue to invest at those levels.”
Anecdotal comments during the quarterly conference calls also indicated a cap on gas of around $6.00/Mcf. For instance, Petrohawk Energy Corp. said “present values at $6/Mcf justify opening Haynesville chokes at the cost of ultimate recovery,” while Chesapeake Energy Corp. said it would increase natural gas capex when gas prices went above $6/Mcf.
“As 2Q2010 earnings season draws to a close, we see a combination of willingness for E&P companies to outspend their cash flow (overflowing with shale opportunities) and the realities of above-average storage levels, the stubbornly resilient gas-directed rig count and the corresponding production growth that is resulting from record horizontal drilling,” said the TPH team.
“At [the] current 980 gas-directed rig count our (recalibrated!) supply model predicts 2 Bcf/d of annual supply growth (roughly plus 3.5%) compared to estimated normalized demand growth of 1 Bcf/d annually (plus 1.7%).” The current rig count is up 44% y/y and the horizontal rig count is at an all-time high.
Increased coal prices, higher well costs or more robust demand growth “could push our $6/Mcf forecast higher,” said the TPH team. “Don’t hold your breath waiting for it…you could easily die.”
For the natural gas liquids (NGL) market, TPH analysts “expect regional pricing dislocations driven by E&Ps chasing liquids-rich plays that will result in continued pressure on natural gas liquids as a percentage of crude oil prices. NGL realizations have a seasonal component; 2Q2009 to 2Q2010 NGLs have dropped from 50% of crude to 47% of crude.”
TPH now expects oil prices to average $70/bbl in the last half of the year, which is up from a previous forecast of $67.50. In 2011 the team expects oil prices to average $80/bbl, which is $5 more than an earlier forecast, and going into 2012 and beyond, prices are expected to be about $90/bbl.
Tradition Energy on Wednesday revised its gas price forecast for 2010 to $4.85/Mcf from $5.25. Crude oil prices, however, are forecast to be $75/bbl, compared with an earlier estimate of $71.
The oil price “has been tightly correlated with strength in equity markets, which have consistently priced in potentially better economic growth, despite decidedly mixed economic data,” Tradition analysts noted.
“Natural gas, on the other hand, has been the one energy commodity most attuned to supply and demand. Increasing production from shale gas plays throughout the country has been more than sufficient to offset elevated demand from power generators due to hot summer temperatures throughout most of the country, while industrial demand for natural gas continues to lag 2008 levels.”
Addison Armstrong, the senior director of market research for Tradition, said many factors contributed to the revised estimates, “including the European debt crisis, lackluster manufacturing activity and consumer confidence in the U.S., and slowing GDP [gross domestic production] growth in China.
“As a result, energy prices slipped lower and then stagnated, unable to gain direction as nearly all markets appeared to be oversupplied. Natural gas, despite a brief rally in June, has been in a downtrend all year due to abundant supplies and increasing production.”
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