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 Tuesday.
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 Daily GPI, March 15).
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.
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