Energy analysts with Tudor, Pickering Holt & Co. (TPH) on Thursday climbed on the train to anywhere but here for natural gas prices, cutting their outlook for 2012 by more than $1.00 to $3.25/Mcf from $4.32.
Longer term, however, the Houston-based analysts said they would maintain a $6.00/Mcf long-term price — as in 2016 and beyond.
Supply likely outpaces demand growth through 2013,” wrote the analysts in their outlook in 2012 for North American exploration and production (E&P). “Deep cuts to gas-directed rig count are needed to improve gas fundamentals in the near-term. Over time, we think gas improves with less gas and more oil-directed activity and we believe demand improvements will support higher gas prices in the long-term.”
The price reductions certainly aren’t the first in recent days. The Energy Information Administration earlier this week said Henry Hub spot prices should average $3.53/MMBtu in 2012, which is down nearly 50 cents from the 2011 average spot price (see Daily GPI, Jan. 11). Bank of America Merrill Lynch cut its price forecast to $3.30/MMBtu from $4.30, one of several energy analysts to chop prices since the year began (see Daily GPI, Jan. 9; Jan. 4).
TPH’s new price estimate for 2013 was cut by $2.00 to $4.00/Mcf, and its forecast for 2014 dropped by $1.75 to $4.25. In 2015 gas prices are expected to average around $4.50/Mcf; TPH earlier had forecast prices would hit $6.00. Only the $6.00 2016 gas price forecast hasn’t changed.
The forward curve for 2012 gas prices now is set at $3.00/Mcf, well below a consensus prediction of $4.27. In 2013 TPH’s forward curve estimate is $3.75, versus a consensus of $4.76. The forward curve in 2014 is set at $4.22/Mcf, versus a consensus of $4.94, while in 2015 it’s $4.53 versus $5.34.
In their analysis of the E&P sector, the TPH team said the “key takeaway is most companies can fund” through the end of 2013. The “biggest funding gap” was seen at Chesapeake Energy Corp., which is expected to be “filled” by a combination of asset sales, midstream dropdowns and joint ventures.
The Marcellus Shale is the “best gas play” in the United States and at current price levels, “the only basin where dry gas should be drilled,” analysts said.
Last year can best be summed up in one word, “volatility,” said the analysts. The E&P index fell 7% year/year with a 30% standard deviation. However, the Marcellus Shale “heavyweights” rose above the fray, with Cabot Oil & Gas Corp., Range Resources Inc. and EQT Corp. the “clear winners.”
Even though market sentiment on the gas industry was poor through last year, the Marcellus-aligned producers benefited from a “significant shift in perception of asset quality because of the northeastern play. The Marcellus Shale “is working at low gas prices.”
Cabot on Thursday said it realized more than $3.90/Mcf in 4Q2011 for its Marcellus gas in northeastern Pennsylvania, the result of the market price, which averaged around $3.18, and hedged gas prices of more than $5.17 that covered 215 MMcf/d of output. In January, the market price of gas sold is about $3.00/Mcf and when combined with hedges covering about half of daily volumes, the overall Marcellus realization is “in excess of $4.00/Mcf.”
January also will be Cabot’s first month for deliveries to the Transcontinental Gas Pipe Line (Transco), which includes sales of more than 200 MMcf/d “at pricing that exceeds traditional Tennessee Gas Pipeline pricing,” Cabot noted. “This will help temper negative swings in price…”
According to TPH’s basin analysis the “next regions that become uneconomic are the core Haynesville, Barnett and Fayetteville,” and “pain early” could shift this trade “from short-lived to an investment if more than our forecasted minus 135 y/y gas rig cut happens.”
With gas prices falling below $3.00/Mcf and supply growing 11% y/y, “investors are looking for signals that gas supply/demand is improving,” said the TPH team. “We see two paths for gas, ‘pain early’ and ‘pain late.'”
The early pain, said analysts, has resulted from a lack of winter weather, forced withdrawals from gas storage, lower spot prices and a dramatic reduction to activity levels early in 2012. Talisman Energy Corp. earlier this week announced a big cut to its gassy ’12 E&P spending as it shifts to more oily leaseholds.
However, there’s more pain to come as gas shut-ins begin when storage begins to fill in August and September, said the analysts. The “big gassy E&Ps” in the Haynesville Shale likely may cut activity by 3% and even deeper cuts to rig counts may be in the offing.
Service costs are expected to improve in 2012 but regional pressure points are sure to persist.
“We’re forecasting total U.S. rig count to increase modestly in 2012 (plus 2% y/y), with plus 25% y/y of pressure pumping capacity being added. However, horizontal oil plays likely remain tight as robust growth is expected in the Permian (plus 50% y/y) and Bakken (plus 25% y/y). Bias to our 2012 estimates is lower gas rig count and higher oil rig count.”
For now, oil remains the “go-to” commodity, with the horizontal drilling in the once old, now new again Permian Basin the “hot play,” said the TPH team. “Horizontal success will improve economics, lower marginal costs and decrease the sensitivity of the basin to crude prices. Other emerging areas to watch are the Mississippi Lime and the Utica, where public and private industry guys are more excited than investors.
Â©Copyright 2012Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.
© 2022 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |